US National Debt Does Not Matter?

[Sig]

No, use U$ to buy up US companies, real estates...., like sovereign wealth funds from Saudi, Singapore, Norway, etc.

In the 1980's Japan was going to own the entire United States by the turn of the century. Regular articles about it in the financial and popular press, movies made about it.... We all know how that worked out.

If you're the United States you're actually far better off from a realpolitik perspective if the rest of the world has their wealth tied up in your economy but doesn't get to vote in your elections. It gives them a big incentive not to do anything that destabilizes your economy, and the U.S. doesn't lose sovereignty by foreign countries owning real estate or even U.S. companies which are mostly multi-national now anyway. That somewhat answers the Venezuela question as well (far more complicated real answer), no other country has enough of their own assets tied up in Venezuela to care that they tank their economy.

 

[sle]

MMT is very clear. Government spending is limited not by revenue, but by inflation. Venezuela and Zimbabwe don't need to apply. Currently US deficit has multiplied since the recession with US inflation target 2% yet to breach.

The key caveat there is the causality of inflation. One can easily imagine a cascade of inflation expectations brought on by large debt issuance, that causes an increase in borrowing costs that produces a drastic increase in the debt servicing payment. It's a vicious circle that can be hard to break, especially in the modern financial framework where sovereign finance is very related to warfare.

 

[srinir]

The key caveat there is the causality of inflation. One can easily imagine a cascade of inflation expectations brought on by large debt issuance, that causes an increase in borrowing costs that produces a drastic increase in the debt servicing payment. It's a vicious circle that can be hard to break, especially in the modern financial framework where sovereign finance is very related to warfare.

I disagree. Inflation expectation doesn't go up just because of drastic debt in a sovereign country when there is lot of slack in the economy. Inflation goes up when the country is at the full employment and/or when there is no productivity growth. We had record issuance of debt since the beginning of this century. Inflation is yet to breakthrough.

Another point of contention is drastic increase of debt is because of tax cut, where all that money spent ends up being little revenue enhancer for the government, since those rich people spend little in the economy. If the drastic increase of debt is because of improving crumbling infrastructure, then it has multiplier effect because most the money spent in the economy generates lot of revenue, since all those poor and middle class people spends entire paycheck back in the economy. All those improved infrastructure shows up in productivity growth also. In the second case inflation will be very well contained because of more revenue and productivity.

 

[piezoe]

...Inflation goes up when the country is at the full employment and/or when there is no productivity growth.

Thank you for pointing this out. Since we transitioned to fiat currency in 1971 we have, in effect, been on a productivity standard. Where the buying power of the currency is backed by productivity. When there was a tighter link between labor and productivity, it could be said that we were on a labor standard, and indeed that's what the MMT economists believed , and I think perhaps a few still do. But automation has loosened the link between labor and productivity and now I think it is better to think in terms of a productivity standard behind the currency. In the end, a currency is worth what you can buy with it. How much currency is in circulation and available to be used for purchasing goods and services versus the demand for goods and services and the amount of goods and services available for purchase is what determines inflation.

Before I studied the MMT economists, I had erroneously thought that Zimbabwe's hyperinflation was caused by too much printing. I now understand that the underlying cause was plummeting productivity after Mugabe nationalized Rhodesia's very productive farms and turned them over to his freedom fighters , whereupon farm productivity took a nose dive. Finally, Zimbabwe has recognized the root of their problem. Before the revolution Rhodesia was "the bread basket of Africa".

Apparently the thinking of many, including some older economists, is still stuck in the pre-1971 era.
Anyone interested in economics, finance, banking, money or the markets, would benefit from studying MMT.

 

[ironchef]

Thank you for pointing this out. Since we transitioned to fiat currency in 1971 we have, in effect, been on a productivity standard. Where the buying power of the currency is backed by productivity. When there was a tighter link between labor and productivity, it could be said that we were on a labor standard, and indeed that's what the MMT economists believed , and I think perhaps a few still do. But automation has loosened the link between labor and productivity and now I think it is better to think in terms of a productivity standard behind the currency. In the end, a currency is worth what you can buy with it. How much currency is in circulation and available to be used for purchasing goods and services versus the demand for goods and services and the amount of goods and services available for purchase is what determines inflation.

Before I studied the MMT economists, I had erroneously thought that Zimbabwe's hyperinflation was caused by too much printing. I now understand that the underlying cause was plummeting productivity after Mugabe nationalized Rhodesia's very productive farms and turned them over to his freedom fighters , whereupon farm productivity took a nose dive. Finally, Zimbabwe has recognized the root of their problem. Before the revolution Rhodesia was "the bread basket of Africa".

Apparently the thinking of many, including some older economists, is still stuck in the pre-1971 era.
Anyone interested in economics, finance, banking, money or the markets, would benefit from studying MMT.

As a lay person, my question is whether it is a chicken and egg issue rather than one and not the other issue:

Zimbabwe printed money because of government deficit, deficit came because they spent more than they received, so when productivity plummeted as long as the government sized their spending accordingly, they should be no hyperinflation. Therefore the hyperinflation came from printing money???

My head is spinning.

 

[piezoe]

As a lay person, my question is whether it is a chicken and egg issue rather than one and not the other issue:

Zimbabwe printed money because of government deficit, deficit came because they spent more than they received, so when productivity plummeted as long as the government sized their spending accordingly, they should be no hyperinflation. Therefore the hyperinflation came from printing money???

My head is spinning.

Of course. However if you suddenly produce much less of what others, want you may have a hard time reducing what you want in proportion.

 

[ironchef]

In the 1980's Japan was going to own the entire United States by the turn of the century. Regular articles about it in the financial and popular press, movies made about it.... We all know how that worked out.

If you're the United States you're actually far better off from a realpolitik perspective if the rest of the world has their wealth tied up in your economy but doesn't get to vote in your elections. It gives them a big incentive not to do anything that destabilizes your economy, and the U.S. doesn't lose sovereignty by foreign countries owning real estate or even U.S. companies which are mostly multi-national now anyway. That somewhat answers the Venezuela question as well (far more complicated real answer), no other country has enough of their own assets tied up in Venezuela to care that they tank their economy.

Good points, especially if you own fixed assets, they can be nationalized when push comes to shove.

On second thought, you may need to own only a small percentage of the asset to influence politics? Just like corporate ownership?

 

[fkienast]

I have finished reading Ray Dalio's book Principles of Big Debt Crises, as recommended by Magic. There is an incredible amount of material there, but I think it was very helpful in helping me understand the answer to my original question.

As Specterx points out, it makes a big difference who the debt is owed to (own country vs. a foreign country). Owing the debt to ourselves is far less serious than owing it to another country, and having it denominated in a different currency (as was the case with Germany after WWI). As well, the fact that the debt is denominated in dollars, which presently is the de-facto world currency, makes it less of a problem.

At some point though, let's say arbitrarily when the debt reaches 200% of GDP, it is might well to become a problem. That is where Japan is right now with their debt. At the present rate of debt increase, the 200% point is 15 to 20 years out. However, during recessions (even mild ones, such as those seen in 1991 and 2001), the debt increases faster than it increases during times of prosperity such as recent years. So I could certainly make a case for it becoming a problem sooner - perhaps in a decade or so. The most concerning thing I see, based on what I understand now, is that US GDP is growing sluggishly. In fact, debt is growing almost as fast as GDP, which makes it look like the only growth in GDP is that being financed by "stimulus" (in the past year, by the the Trump tax cuts). But of course lots of things can change in ten years. There may be some new technology that gives us big productivity gains like computers did in the 2000s. There may be a breakthrough in energy sources - something extreme like cold fusion, or something less dramatic such as decreasing costs for renewable energy such as solar and wind power. Maybe quantum computing or a cure for cancer or another disease - who knows - lots can happen in a decade.

Another possibility to increase productivity would be a serious investment in infrastructure. The most recent tax cut did little to increase productivity. Companies who saved money in taxes used most of the savings for investment (such as buying back stock shares). This does not help productivity - it only helps inflate asset prices (notably, stock prices). Had the same debt that was financed by the tax cut instead been invested in infrastructure (improving highways, developing high-speed alternative transportation, improving energy efficiency in existing structures, etc.) we might have seen a bigger increase in productivity (and thus GDP).

I have also learned (from other sources) that the premise being discussed in this thread has a name. The premise that debt does not matter, as long as inflation is kept in check, is known as Modern Monetary Theory. This is a new idea that was first conceived by economists in the 1970s, but few people had heard of it until recent years. I see there are a couple of other recent threads here that discuss it; I didn't realize that they were about my question because I did not know it by this name. Modern Monetary Theory is now starting to reach Main Street, for example in news articles such as the ones that prompted my original question in this thread. I have even seen it mentioned by members of Congress when discussing how to fund future programs.

One conclusion that I feel is tradeable is the realization that the growth rate of the deficit would be much worse if it were not for interest rates being so low today. With that in mind, I would predict that interest rates will not be "normalized" (to long-term historic "normal" levels) until there is absolutely no other choice under duress of severe inflation. So I think interest rates presently are about as high as they will go, and if bond prices show them increasing significantly any time in the next few years I would be willing to trade the other side.

 

[sle]

Thank you for pointing this out. Since we transitioned to fiat currency in 1971 we have, in effect, been on a productivity standard. Where the buying power of the currency is backed by productivity. When there was a tighter link between labor and productivity, it could be said that we were on a labor standard, and indeed that's what the MMT economists believed , and I think perhaps a few still do. But automation has loosened the link between labor and productivity and now I think it is better to think in terms of a productivity standard behind the currency. In the end, a currency is worth what you can buy with it. How much currency is in circulation and available to be used for purchasing goods and services versus the demand for goods and services and the amount of goods and services available for purchase is what determines inflation.

Before I studied the MMT economists, I had erroneously thought that Zimbabwe's hyperinflation was caused by too much printing. I now understand that the underlying cause was plummeting productivity after Mugabe nationalized Rhodesia's very productive farms and turned them over to his freedom fighters , whereupon farm productivity took a nose dive. Finally, Zimbabwe has recognized the root of their problem. Before the revolution Rhodesia was "the bread basket of Africa".

Apparently the thinking of many, including some older economists, is still stuck in the pre-1971 era.
Anyone interested in economics, finance, banking, money or the markets, would benefit from studying MMT.

This said, I think MMT in the form that it is being brought up (primarily by the extreme left) is not helpful in the policy debate. It just unrealistic that government policy should be concerned about inflation and that the monetary authority should be financing government spending (and the whole thing that don't worry about deficits to the extent that they don't cause inflation). First of all, that means that the fiscal authority, (i.e. U.S. Congress) has to regulate aggregate demand to modulate inflation. If the inflation is ramping up, Congress should raise taxes and cool the economy down. If inflation is falling the Congress should lower taxes and allow deficits to juice the economy. This would never work, the incentives are exactly the opposite for politicians.

Maybe the MMT assumes an independent fiscal authority in the same way that we have independent central banks. Or maybe it assumes a formulaic tax model where the level of taxes is tied to inflation. Not sure, but the way it's being used in the political discourse is not the way it was intended and, more importantly, it's a pretty immature model that still needs lots of work.

 

[slvrrisc]

The politicians can skimp by the responsibility of the national debt for years on end as long as the petrodollar mechanism continues to be reinforced by the U.S. global military and political might (at the risk of future war). At this point, can even the yearly national tax revenue ever pay off the debt? Short of a tyrannical seizing and wealth transfer of global corporate profits by the government, it may be far too late now and maybe only the U.S. recycling of debt in relativism with other nations' performance with their debts (like the "productivty standard" mentioned) is the only game that matters now.