We live on the edge of a run on sovereign debt. The US has a shorter maturity structure than most other countries, and a greater problem of unresolved entitlements. Despite our “reserve currency” status, we may actually be more vulnerable than the rest of the high-debt, large entitlement western world.
That is at the end of a long post that makes points that I have made over the years.
We need to index retirement age to life expectancy and replace hopelessly heroic end of life care with cost effective aging and illness avoidence and anti-aging. And bring the troops home. Easier said than done, but when are we gonna start?
This nation had a Huge Financial Crisis and why did not happen in 2008 – 2010? Outside some reasonable increase in Chinese reserves with large trading partners this issue really did not move:
1) I believe the reserve status does not benefit the lower half as there is lower labor competition. So I bet a lot of citizens would benefit from this change in status.
2) Doesn’t Japan go first here? Their government debt and demographics are worst in any nation.
3) I still say the Ross Douthat ideas on increased family size would impact this debt issue.
4) Somebody else will have to replace the dollar. The two currencies that can potentially are the Euro and Yuan. I am dubious of the Euro here as we are struggle with country debt crisis for awhile. What happens to Chinese manufacturing when their wages close in on US? And does China allow for creative destruction that sends unemployment to 8% – 10%? (China goes Japan IMO.)
I suspect the flight to “quality” and best house in a bad neighborhood factor. I suspect they should use this opportunity to extend maturities and shore up liabilities.
In general I don’t disagree with you but I do find it contradictory that right after the Financial Crisis in 2008, the dollar went up in 2009! (Went down 2010 – 2012.) And for all the fears of China taking charge after 2008, most of their activity was limited and China has yet to let the Yuan completely float.
Otherwise, I do tend to believe that the bottom 50% of the population has been hurt by the reserve status (due to massive labor supply competition.) so I am not as concerned as John Cochrane and others.
We want a world-dominant military, government-paid healthcare and pensions, and low taxes. The bill is sent to the one constituency that can’t object – the future.
A run on sovereign debt sounds great. Where do we run to? Some soon-to-be-contraband asset like Bitcoin?
Economists do a disservice to the topic when they discuss a “run on US debt.” That simply wont happen. The choice will be between inflation and cutting future spending obligations. Not between default and future spending.
This explains why you’re massively short T-bond futures for your own account, Arnold. Oh wait, you’re not?
But it’s all in the timing, isn’t it?
Being massively short anything is too risky. I doubt you could assume anything about someone’s beliefs who did that. Also, I think the big problem is the very fact that the government can always pay.
My point is that someone who really believes that a run on sovereign debt is imminent will be short. Not “might” be short, but “will” be short.
If you’re not short, then you don’t really believe it: economists have been having it both ways for too long. Time for some accountability!
Seriously, where is the imminent run on US debt? Time and again – over literally hundreds of years! – none of these warnings amount to anything. Honest question – what would get you to scrap your model in favor of one that fits the facts.
The US should use their “reserve currency” in improving their country. I think it’s possible for a powerful state to be weakened if everyone is living in a decadent way.