a debt crisis is always an improbable scenario. If we could be sure that a debt crisis will occur, then we would already be in one. If investors thought that the U.S. would have difficulty rolling over its debt next week, then they would stop buying bonds today, and the U.S. would have trouble rolling over its debt today, so that the crisis would take place today.
Well, one is tempted to re-visit that old adage, “That one goes bankrupt slowly, over years, and then finally, all at once.”
One could posit for the US, that someday, someday….it will “happen all at once.”
On the other hand, the Bank of Japan has been buying back Japan national debt for years, and now owns about half of it, one of the world’s highest debt to GDP ratios, something around 250% debt to GDP.
What does national debt mean when the government owns the debt? It is the Mobius strip of national finance, not taught in textbooks and heretical…but there in real life.
Japan has been teetering on deflation for 20 years.
The MMT crowd may be onto something, but I think they have to re-frame their arguments as supporting “money-financed fiscal programs” as opposed to higher and higher debt loads.
The Japanese truly do owe the debt to themselves, but this only works because the country as a whole is the world’s biggest creditor. The latter is probably its own kind of foolishness, but there it is.
I would like to understand why most experts believe we will see low inflation and low interest rates. To me that seems like head in the sand thinking. What could we possibly do more than we’re doing today to trigger inflation?
I’m concerned about inflation but I think a case can be made that inflation and interest rates can remain contained.
Current inflation appears elevated, but it seems that part of the reason for that is temporary pandemic related shortages of things like used cars, chips, labor, etc. These markets will eventually adjust and the prices for these scarce things will either fall or perhaps remain high without much continued growth for a while. The price of used cars already appears to be falling, for example. To the degree that high inflation is stickier than we thought, the Fed can and will taper, the Fed can sell bonds, and the Fed can raise interest rates.
The fiscal stimulus of 2020-2021 was in response to an extraordinary macroeconomic situation which has now passed. No additional large stimulus measures should be expected. Additional spending programs will be paired, for the most part, with taxes, and any incremental annual deficit from such programs will be in the $50 billion range rather than the multi-trillion range of the 2020-2021 stimulus bills.
It appears that a lot of the inflation went into driving up asset prices, but higher asset prices shouldn’t necessarily lead to a surge in good/service prices as assets can be used to pay for goods and services over the course of decades, and the very act of selling assets to buy goods and services will put downward pressure on asset prices.
You have an extraordinary optimism about the willingness of government decision-makers to make unpleasant decisions:
“To the degree that high inflation is stickier than we thought, the Fed can and will taper, the Fed can sell bonds, and the Fed can raise interest rates.”
“Additional spending programs will be paired, for the most part, with taxes,”
I said that the case can be made, though to be perfectly clear I don’t have high confidence. I think there’s a serious risk that inflation will be permitted as the short-term cost of squashing the inflation will be considered too high politically.
One possible future is that the United States is transitioning to a Latin American nation – and while defaulting on dollar denominated debt will never be necessary, the country will experience bouts of high and variable inflation, increased corruption & crime & inequality between the oligarchs/elites and regular Americans. That, along with some corporate version of China’s social credit system.
“What could be done to trigger inflation?” – more regulation, red tape, and putting gov’t regulation obstacles, like COVID, Climate, CRT, or any inequality regulations, which reduces the “market” (free people making decisions with their resources) reactions and flexibility.
Arnold thinks as inflation increases, workers will “demand” higher wages; but the mechanism is not mentioned. Strikes? Petition? Asking for a raise? (Please sir, could I have some more?)
In reality today, one should ask for a raise, look inside the company for a position that pays more, and look outside the company – most find more cash more often outside.
The prices of normal, non-supply constrained goods, remains market competitive low, growing slowly. See milk, bread, Big Mac prices going up much much slower than stocks and houses (in good areas! Good neighbors … not too many of “them”, the bad neighbors).
If taxes and regulations, like price controls, make the market fail to respond to higher prices with higher production, there will be Venezuela like shortages and inflation.
With (mostly) free markets allowed to adjust as needed, the large amount of capital available insures that the “cost of money”, the interest rate, remains low.
The vast majority of “wealth” is financial instruments – equity shares, contract paper, owned by the rich.
The rich elites are learning how to bribe voters with printed money to allow voters a little increase, while the elites have much larger increases.
The anti-inequality goal should be to have the working middle class be getting richer, faster, than the rich are getting richer. The poor are also getting richer, but even more slowly – and too often based on bad individual decisions that they make, often just like their social network full of others making similar bad decisions with similar bad results.
A sad moral hazard reality is that as the gov’t tries to compensate for bad results, it inevitably subsidizes bad/ risky decisions that more often give bad results. Which are then labeled “unfair” or “unjust”, because those who made good decisions are SO MUCH better off.
(The mistaken belief that unfair = unjust is a comment beyond the scope of this question.)
Presumably a debt crisis would be defined as sharply rising interest rates and the Treasury having difficulty finding buyers for its debt offerings. It is hard to see how that would occur as long as the central bank purchases the offerings at a price that maintains the low interest rates. So far, the resulting inflation from this money creation has been absorbed into inflated marketable asset prices (stocks, bonds, real estate, collectibles, etc.), though it now seems to be spreading to consumer prices due to the sheer volume of created money resulting from “stimulus” legislated in connection with Covid.
Our ruling class has done very well for themselves under this regime, but they have now resumed policies that damage the working and middle classes after the short relief provided by President Trump’s actions on trade and immigration.
Having gotten a taste of much higher levels of debt financed spending increases the Congress shows no sign of going back. Under the spurious guise of humanitarian interventions, and in fear of political revolt, they are desperately shoveling money out to buy campaign contributions from donors. The deficit problem can’t be alleviated with tax increases – no tax increase large enough to make a difference is feasible; it would tank the economy and produce no revenue. Only a value added tax on consumption coupled with spending restraint could produce sufficient revenue to make any kind of temporary dent, but enacting one would be political suicide, and in any event the Congress would quickly spend it all and more.
The current regime of fiscal largesse, financial repression, and concomitant asset inflation has been grossly inequitable, but surprisingly stable until recently. But with inflation getting out of control, that stability could evaporate. As for controlling inflation, interest rates comparable to the those of the Volcker years and high enough to stop inflationary expectations would utterly collapse both our inflated marketable asset prices and our excessively leveraged economy. In any case, the Congress would not tolerate any substantial moves in that direction.
We are more likely to face a political crisis than a debt crisis because of the squeeze on the working and middle classes, who now have little trust in the ruling class, the media, etc., and rightly feel they are being abused for others’ advantage, not only economically, but with cultural insults being piled on as well. Those in power are trying to hang on through electoral fraud and a hyper-partisan media that has replaced journalism with sheer propaganda, but their credibility is collapsing and the formerly politically passive working and middle classes (passive because they never had any way to express their discontent until Trump) are starting to awaken, much to the concern of the elites who are now violating all restraints on their abuse of power.
Perhaps a tipping point is not far off, but what may come out of any revolutionary situation is unpredictable.
Our ruling class has done very well for themselves under this regime, but they have now resumed policies that damage the working and middle classes after the short relief provided by President Trump’s actions on trade and immigration.–Thucydides
The topic of open borders never gets mentioned in polite company.
Add on property zoning, that exploded property prices.
Much higher Social Security taxes on wages than 50 years ago.
To be fair, Americans also embraced out-of-wedlock births and divorces, bad ideas. There is blame to go all around, but mostly from top down.
Today, there are “labor shortages.”
It is as if an entire swath of the population is invisible. We never saw headlines about “job shortages.” These may the best times in decades for the bottom third of the labor force, about 50 million people.
This is a bug, not a feature?
Sez who?
You may as well ask how Argentina manages to sell its new debt after every default, Arnold.
This is always non-linear- nothing, nothing, nothing, then calamity.
Several decades ago, when I was younger, a person explained to me how Donald Trump was smart to have such massive mortgages with big banks:
“When you’re a borrower who owes a small amount of money, the lender owns you, but when you borrow a huge amount of money, you own the lender.”
Ben Cole gets a free T-shirt for immediately mentioning Japan. There’s also the example of the 1950’s and 1960’s U.S. economy when massive NGDP growth drove down the servicing costs of the National Debt.
I heard this relative to Argentina:
When you owe the bank a million $$, you have a problem.
When you owe the bank a billion $$, the bank has a problem.
This is a misunderstanding of how the Treasury market works, the public doesn’t buy debt from the treasury, primary dealers who are obligated to buy the debt do so, who then sell it back on the secondary market. If those primary dealers ever panicked and only bid for the treasuries at 20% they would tank the value of their own holdings and be immediately bankrupt under mark to market accounting. The secondary market is filled with institutions that hold Treasuries as collateral for regulatory compliance and foreign holders are typically non profit motivated groups (ie governments and CBS). For most of these institutions it doesn’t matter if they think the US is going to default, if the US defaults they are bankrupt either way while dumping your treasuries makes it fundamentally impossible to do business within the US regulatory structure. It doesn’t matter if a pension fund manager thinks the treasury market will implode if he is contractually obligated to buy them or some other security that is explicitly or implicitly backed by treasuries. Either way such an event bankrupts the pension fund.
This happened to a lesser extent during the housing bubble, you don’t bother building models for a 20% decline in home prices if such a decline will bankrupt you anyway. Anyone who proceeds with the caution that such a fear would require will not be managing a mortgage lender much longer. Eventually all managers are simply people who scoff at the idea of such a decline and it is not even the beginning of the decline (2006) which precipitates the crisis, but it is the point at which the charade can no longer be carried out (September 2008) that it all falls apart.
Our system is not built on rational expectations, it is built on regulatory compliance. If you do A, B and C (and D through quadruple Z) then you are legally allowed to be in business and if you happen to go bankrupt your assets will be transferred (with funding supplied by the Fed) to one of your competitors who was doing almost exactly the same thing but wasn’t the first one to go under.
The Afghanistan debacle amplifies your point. In human affairs, “a collapse in 90 days”, which was the intelligence assessment, means a collapse now. Perhaps the CIA should have read your paper.