Will the US deficit ruin us all?

[TopHatFox]

https://www.youtube.com/watch?v=O_TjBNjc9Bo

19 trillion as of 2016. I don't know if nations are different than people, but usually if a debt gets so large, all of our nation's "income" will end up paying interest on the ever increasing debt principal to other countries and US bond holders. What happens when the US defaults on its debt, and when is it likely for such a default to happen? Hm.

[7Wannabe5]

Won't happen. We have all the food.

[chenda]

No. A US default is extremely unlikely. Historically the US debt has been much higher, and the economy nonetheless grew, indeed even thrived.

[Dragline]

Yes, there is almost no risk of default because the US can print/create as much money as it wants. This is the "inflate the debt away" strategy for dealing with debt.

To understand how this has worked historically in many different contexts, you would need to read this: http://www.amazon.com/gp/product/B004EY ... TF8&btkr=1

The premise of the video is wrong, because we have a fiat currency -- borrowing from outside the US is unnecessary. The US treasury can always sell bonds to the Federal Reserve, which buys them with dollars it creates electronically out of nothing. Nonetheless, so long as the dollar is the world's reserve currency, there will be a large demand for it that will keep it strong. If the dollar loses that status, then you can have a hyperinflation problem.

So what about the possibility of hyperinflation right now or in the foreseeable future (Weimar or Zimbabwe style)? Although I have asked this question dozens if not hundreds of times in all kinds of fora, I have never received a positive answer: "Can anyone point to any historical example where the world's reserve currency suffered a bout of hyperinflation (defined as > 10% per month for six months or more)?" I am still waiting for one example. When somebody gives an example I may actually start to pay attention to this meme again.

[jacob]

"Can anyone point to any historical example where the world's reserve currency suffered a bout of hyperinflation (defined as > 10% per month for six months or more)?"

That's a straw man argument though. Prior to 1970, the reserve currency was always backed by gold and/or silver. In that case we have to go back to the Spanish price revolution when large quantities of metal was stolen/imported from the New World to see sizable currency inflation. Inflation wasn't anywhere near 10%/month, but by historic standards, 20th century standards have been characterized by extreme volatility and range of variation. Aside from the 20th century, 2% annual inflation used to be a very big deal; historically interest rates were effectively exclusively determined by credit risk plus a 3% growth return.

Also consider that reserve currencies are not necessarily completely unilateral. There may be more than one de facto world currency and they can all compete with each other, especially in "regional" intercontinental trade. Last year China created the AIIB (after initial US dismissal and later resistance) as a direct competitor to the IMF and the World Bank. Lots of trade between e.g. Russia and China is no longer settled in USD. Iran has switched to wanting payment for its oil exports in EUR instead of USD.

[jacob]

The US has already defaulted twice in the 20th century by reneging on prior agreements.

https://en.wikipedia.org/wiki/Executive_Order_6102
https://en.wikipedia.org/wiki/Nixon_shock

Both were kind of orderly events although I'm sure some people/countries got burned.

[George the original one]

Worry more about state and local government defaulting. They can't print money, only raise taxes or reneg on payments. Classic cases: Detroit, Orange County, NYC.

[stayhigh]

There will be some kind of default in the future. This amount of debt cannot be paid off without a bit of cheating like large inflation or sudden devaluation. Printing money will not be solution for decades. They are doing this in Japan and Europe for years without any effects. I don't know how accurate this website is, but it looks interesting: http://www.chapwoodindex.com/

So, the question is when and how.

[Dragline]

It's not known to be accurate at all, since it was apparently designed to support a particular narrative: http://tsi-blog.com/2015/07/beware-of-b ... n-indices/

That they are able to print money in Japan (especially) and Europe without triggering lots of inflation is interesting, because it shows that the models that have been predicting massive inflation (and their accompanying narratives) are wrong and have been wrong for a long time now. (Leading to the experts' BS lament -- "I just know I'm right about my narrative, its just my timing that's off".) The problem with most of these theories going all the way back to Uncle MIlty (Friedman) is that they assume a constant velocity of money. In fact, the velocity of money in almost all developed countries has been declining since the 1980s and continues to decline. See, e.g., https://research.stlouisfed.org/fred2/series/MZMV

Besides an explanation for the drivers of the velocity of money, what is missing from most models is the complete lack of attention to private debt/credit expansion and contraction. In effect, when your model only concerns public debt you are not dealing with a full deck and you get garbage-in, garbage-out models and predictions.

People would rather have simple narratives that align with their beliefs than consider complex problems and the inherent uncertainty surrounding them that may also cause them to experience cognitive dissonance.

[cmonkey]

It's pretty clear where the cuts need to be made. Entitlements!!!!

In reality this will never be done voluntarily. Looking at the latest stats, outflows have already exceeded inflows less interest on the funds for the main Social Security fund. I think that happened in 2010. Outflows will exceed inflows including interest starting in 2022. At that point the fund will start depleting until in the early 2030's the only Social Security benefits to be paid out will be whatever is paid in.

I know people that have benefits on the order of several thousand per month. It's still not enough for them as they complain about other people drawing 3K, 4K, 5K per month. That's on top of any savings and pensions.

Gonna be a lot o' whinin' going on!

[BRUTE]

military spending is part of "entitlements".

[tylerrr]

@ffj -

Agreed....I am convinced it is just a matter of time before entitlements are cut in this country. I'd say they'll be cut by about 50% eventually. Every 4 years, this issue of entitlements gets kicked down the road because politicians never want to tell the public this bad news.

Keep workin' hard, millions on social security depend on you.

[Riggerjack]

@ ffj, the article is no real threat. Honestly, if there were legislation pending, where American assets were at risk of a foreign court decision, we would bluster, too.

In my opinion, the real threat of our massive debt, is that it is a variable rate mortgage. We currently have pushed down rates, by manipulating the bond market. At some point, we will be selling Treasuries, at the same time a foreign debt holder decides to dump their bonds. Getting buyers will require paying higher rates, at which point, the game is up.

We only make a 19T debt work by paying artificially low rates. We have gone from long term t bills to mainly short term t bills, trying to force even lower rates. This means we are more vulnerable to rates, as bonds come due.

Our entire Federal revenue is only 3.25T. So we owe $6 for each $1 of revenue. How comfortable would you be making 50k/ yr, spending $56769/yr with a variable rate mortgage for 300k?

[Riggerjack]

Really, there is no fix. the UK went this route after WWII, and Japan in the 90's. The stakes are higher, as the scale is bigger, but I'm pretty sure, rot and decay is our path, rather than collapse.

It is in the interest of all the decision-makers to just kick this can down the road. This is not a problem that democracy can fix. I have a plan for collapse, but really, I think a plan for decay is the way to go. Most folks will address this by accepting that a 4% rule will need to be a 3% or 2% rule.

This won't hurt the 1% as much as the 99%, by limiting upward mobility.

[chenda]

@riggerjack The UK's national debt radically fell in the decades after ww2, despite a radical increase in welfare expenditure and the widespread destruction of infrastructure during the war.

[Riggerjack]

Chenda, you and I clearly know different histories. British debt soared with wartimes. Imperial (Boher, Zulu, etc) wars, WWI, WWII, but it wasn't until the great liberalization, that rapid recovery stopped.

http://www.businessinsider.com/historic ... res-2015-9

Matches the history I know. The UK, after WWII, had massive debt, and a trashed infrastructure, but immense US aid. It was able to put it's economy back together, but it's days as an economic super power were over.

Japan had the same story, delayed a few decades, due to much higher population damage, and occupation.

We, on the other hand, have built near WW debt, fighting a war on... Poverty? Drugs? Terrorism? Dollars? The Middle Class? Spending cuts? Yeah, it must have been one of those.

[Dragline]

If you are looking for the next shoe to drop, you'd be better off monitoring private credit expansion and default rates than governmental, because unlike the governmental data analysis, that data actually correlates well with economic downturns. See http://www.businessinsider.com/systemic ... ?r=UK&IR=T

[Chad]

A different take on US debt:

http://www.bloombergview.com/articles/2 ... ebt-crisis

[Riggerjack]

Chad, that article was halarious! My favorite part:

.The national debt is modest and sustainable, and the federal government's borrowing has been remarkably responsible.

With no need to follow up that statement with facts, or supporting arguments.


In fact, for nearly 2 decades, the debt has outgrown the economy by as much as 20%/yr. But now that the latest chart shows the economy outgrowing the debt by 0.4%, it's "perfectly sustainable"!

They were big on unsupported statements, but small on details. I don't know what was included in their numbers, but since they showed the debt/GDP ratio shrinking in the Clinton years, I assume they were excluding SS losses, in the same way the Dems have since the 90's.

You were right, it was a different take on the debt. Somehow, 19T is no big deal. If we were to cut spending by the current deficit, and an additional 20% of revenue, in only 30 years, it would totally be paid off.

I couldn't read that without laughing, so I had to share.

The article is very much worth the read, I highly recommend it.

[chenda]

@riggerjack It's certainly true that the huge costs of the world wars led to a substantial decline in Britain's economic and political dominance. Nonetheless, post war Britain enjoyed a golden age of rapid economic growth, rising living standards and huge debt reduction. It's decline as a share of global GDP is predominantly due to demographically larger countries developing.

With a debt less than half of Britain in 1945 I certainly don't see US rot and decay as inevitable.