I’m pretty sure it will. What happens when the interest on the debt exceeds tax receipts? Serious question. I’m not an economist. If we can’t service the interest on the debt, which is inevitable at this point (IMO…though I don’t know when that will be), what happens?
People will still go to work, shops will keep selling stuff, etc. Trade will continue. Pretty sure our bonds will become worthless (yes?).
May not happen for 20 years, or even 50 years. But I seriously doubt we can “grow our way out of this”. So what happens when interest on the debt gets that large?
I get that you “go broke”. But in terms of government, what actually happens? No one is going to foreclose on the government. Can government “file for bankruptcy” and reorganize debt? Is there hyperinflation (like the Weimar)?
I can dream up all sorts of scenarios, but am wondering what is realistic and what is doom-paranoia.
I think growing our way out of this mess is very unlikely. At the rate we’re adding debt, the US would have to grow GDP at an unrealistic pace.
I’m not an economist either. But it seems self evident that the near-term issue isn’t default, but rather the US running out of capacity to absorb additional debt. The markets don’t have infinite capacity to absorb all of the debt. At some point, demand for treasuries will drop significantly, causing yields to rise astronomically. This will cause lots of pain. All asset values will be affected.
On the bright side, housing affordability will improve…
I agree that this has been propping things up. As debt growth continues to exceed GDP growth, at some point that well will run dry. There’s not an infinite supply of money to dump into treasuries. There’s not an infinite balance sheet to trade and roll over the debt.
Well, it’s difficult to believe that debt as a percent of GDP could keep growing.
On the other hand, it’s just the wealthy lending to themselves, so maybe it can continue for a long time?
I haven’t really tried to think through what could disrupt or overwhelm that mechanism and then what happens next.
Here’s one partial path.
Suppose income inequality is reduced, and more income flows to working people.
What then happens?
Wealthy class have somewhat less income and reduce savings some, putting downward pressure on asset prices (this doesn’t mean asset prices go down, just that there is now somewhat lower demand for assets).
Working class have somewhat more income and increase mostly consumption (their savings could also go up some, but much less than consumption).
Aggregate consumption increases. I believe GDP would increase, at least in the near term.
Consumer inflation would increase, more in areas where production is near capacity, probably less so in areas that are under capacity. If the shift in income is too abrupt, we would get higher consumer inflation (potentially too high for happiness).
If we believe there is underemployment today (I do), higher consumption could also drive hiring as well as point business investment to areas seeing higher consumption.
You ask a deeper question than the one I answered. The answer? Revolution!
The Boston Tea Party
Bastille Day
Hitler getting elected
Bolsheviks
Hugo Chavez
All cases of the people having had enough of lousy economics. Economics, not politics! As long as they can feed their families most don’t really care about who is running the show.
There are two obvious paths. One is the “Weimar” approach, where you just keep printing money, people catch on, money becomes worthless and everything collapses.
The other is that government expenditures are suddenly severely cut back and taxes are raised to try to get ‘more in balance’ so that people will continue to lend you the money to continue financing your deficits, albeit it at a lower level.
When Greece defaulted, government pensions were slashed, other benefits were similarly reduced (think SS, Medicare, etc.) Capital controls were instituted which affected everyone’s ability to use the currency (ATMs, for example, were limited in cash dispensation to stop people from getting cash and moving it out of the country). Major government projects were stopped midstream; contractors went unpaid and often went bankrupt, workers found themselves without jobs (unemployment hit 25%, IIRC), and so on.
It was a spiral of doom, and (obviously) took years to recover. The IMF stepped in with some bridge loans, but even those were too little to do much good, and in any event they refused more until the other spending and taxing policies were reformed.
Oh yes, taxation. Those were changed to improve collections, including starting prosecutions in the notoriously leaky system Greece had (sound familiar?) and I believe many rates were raised as well.
This is just from my memory of reading about it some years ago, I’m sure there are decent histories about this one and others all over the web, including perhaps summaries on Wikipedia.
This is a Macroeconomic question that has been answered many times going back to the Roman empire.
A government actually does have an infinite supply of money to pay the interest on its own debt. Whether it’s a Roman emperor diluting the silver in the denarius with tin or the Federal Reserve buying Treasuries with fiat money created out of thin air (Quantitative Easing) a government can exert “fiscal dominance” over an honest money supply.
The result is inflation because the supply of money is growing faster than the supply of real goods and services.
If the government goes into growing debt to support non-productive uses (wars, health care for the elderly who are no longer producers) - growing spending faster than GDP growth and tax revenue - inflation will increase. If the government increases taxes and/ or helps grow the economy faster the impact will be mitigated.
But @captainccs has listed examples of governments that let the inflationary spiral caused by increasing government debt and degrading currency value. Hyperinflation followed by revolution.
This has happened many times. cf. “This Time Is Different,” by Reinhart and Rogoff.
The U.S. has never defaulted on its debt, including from the American Revolution and Civil War, which were long before a Federal Reserve that could create fiat money.
The question is the balance between GDP growth and government spending growth. The trends are concerning since both the deficit and the cumulative debt are growing as a % of GDP even when the economy is not in a recession.
What is different is the ability of assets and wealth to bypass fiat currency via crypto currency and other digital assets. It doesn’t necessarily avoid revolution. Shortages of basic essentials will tend to cause that kind of uprising. However, the question in my mind is does it potentially hasten the collapse of a currency or does it present a persistent risk that puts Govt’s in check from continuing the spriral?
With past societies, absent direct bartering, liquidity was only available through traditional currencies or hard metals. I don’t know how effective crypto currency will be as an exchange medium. But, given its transparency and finite number, it does allow an offramp from the debasement impacts of fiat money.
I have never trusted cryptocurrency because the assumption that the supply is transparent and finite is based on human inputs that really aren’t transparent.
I would agree and have never held any or inclined to buy it now. But, it is a dynamic that is different than with past societal collapses. Further, on a relative basis, I would say it is less opaque than the behavior by central banks in terms of traditional currencies.
I keep returning to the idea that the best solution is to remain an equity owner in businesses with strong moats and where purchasers will pay in whatever is the currency of the moment to receive those goods and services.
I think the greater risk with such electronic only assets, even more than the lack of transparency and assumed scarcity mentioned by Wendy are two fold:
AI and quantum computing may eventually break their encryption. They are already getting close.
In the proverbial TEOTWAWKI setting, governments will likely find such assets as very easy targets to either severely tax or simply confiscate.
All valid points. It is in my mind worth noting that the technology presents imperfect alternatives that may offer off ramps for some, where in the past, private businesses and citizens are simply held hostage to the fiscal demise. How it plays out, I have no idea.
But that is the thing, it isn’t an off ramp if you can’t use it to buy groceries or to pay your rent.
I am reminded of how more and more businesses are requiring people to pay a 2.8-3% credit card service fee or pay cash. I would certainly fear something worse for digital assets if we found ourselves in dire straits.
Hawkwin
Who will also remind readers that the US government previously made personal ownership of gold illegal - and fixed the price of such - for roughly 40 years - and that wasn’t even due to “end times.”
All real risks and possibilities. Regardless, there exist alternatives today that did not exist during prior economic collapses. These alternatives allow for mobility and unprecedented transfer of large blocks of wealth in ways not seen in prior eras. How effective they are or whether they hasten or delay a decline, is yet to be determined.
I guess this is technically true, however, there are limits / constraints. You mentioned one of them, inflation. There are also regulatory constraints. The Fed cannot purchase treasuries directly from the government, QE requires purchasing from the secondary market. Given that primary dealers of treasuries can run into balance sheet issues, this could affect the Feds ability to carry out QE.
That is the focal point of the problem, you can print fiat money as long as there is added value in the economy to support it. Money is supposed to represent wealth. Print money without wealth to support it and you create inflation, a very regressive tax.
