Categories

Pragmatic Capitalism

Capital for Living a More Practical Life

Federal Debt

« Back to Previous Page
0

Like most of us who have been reading Cullen’s pieces, I understand that the federal government cannot “run out of money” and that the risk is inflation. Every now and then I see an article that presents some numbers that give me pause and make me wonder how we will avoid harmful inflation. I know that past hyperinflations (since 1900) have always had some other severe, exogenous event going on, but wow, the numbers in this article from Reason seem scary. Of course, any projections by the CBO need to be taken with a grain of salt.

Here’s a couple of items from the article that jumped out at me: “in the next decade, net interest will go from $270 billion to $768 billion.”

“The CBO also reports that the share of the budget devoted to those payments is growing, from 7 percent today to 21 percent in 2047.”

Here’s a link to the article:

https://reason.com/archives/2017/04/06/is-the-sky-the-limit-for-the-debt-ceilin#comment

Closed
Marked as spam
Posted by Steve W
Posted on 04/06/2017 11:52 AM
242 views
Private answer

There’s a lot of factors here, but you have to ask yourself what will set the inflation in motion?

From a macro perspective I think there are 3 really powerful disinflationary trends going on:

1) demographics
2) technology
3) labor vs capital

All three of these battles have clear deflationary or disinflationary impacts.

Okay, but let’s say something weird happens and people start losing faith in the USD for some reason. Well, again, we have to ask why that would happen? I would argue that the labor vs capital dynamic means that the demand for USDs will remain strong because corporations are the big winners in the US economy. That is, the reward for productive output remains high. And that leaves the USD at the top of the reserve currency food chain. Those two factors alone mean that there is a small likelihood of the USD losing its value in any significant way. The govt can try all it wants to wreck the currency, but they won’t succeed as long as these big factors are in the way….

Marked as spam
Cullen Roche Posted by Cullen Roche
Answered on 04/11/2017 11:59 AM
    Private answer

    I imagine it’s ironical we’ll stay at the top of the pyramid due to technological unemployment. OTOH, it will allow for a Citizen’s Dividend without inflationary consequences. I’d feel a lot more comfortable with the government following something like a “Taylor’s Rule” for determining a Citizen’s Dividend vs Inflation.

    Marked as spam
    Posted by MachineGhost
    Answered on 04/11/2017 10:51 PM
      Private answer

      The conventional concerns on this issue are on full display in today’s WSJ, page A2 under “Fiscal Plans Could Fuel Rate Surge”.

      Some selected excerpts: “More supply (U.S. Treasury securities) and less demand tends to mean lower prices, and with bonds, lower prices mean higher yields and interest rates.”….. The bond market is about to get hit all at once.” (said Stephen Stanley, chief economist of Amherst Pierpont Securities).

      This one made me smile: “Most forecasters have long expected rates to rise, and been embarrassed by those forecasts when interest rates stayed stuck in a rut.”

      I think “most” forecasters might want to pay more attention to Cullen’s insights on how our monetary system works, QE, and the history of modern hyperinflations.

      Marked as spam
      Posted by Steve W
      Answered on 05/08/2017 10:38 AM
        Private answer

        My base case is and has been for about a decade, lower inflation for longer. As I said before, those three trends are tremendous downward pressure son inflation. Hard to imagine how that changes in the coming years.

        There will be times when bonds are riskier than normal (and I’ve highlighted many of these times), but the long-term trend is clear in my opinion.

        Marked as spam
        Cullen Roche Posted by Cullen Roche
        Answered on 05/08/2017 2:16 PM
          Private answer

          I think it will be interesting to see if we can have stagflation 2.0 if wages ever start rising and corporate profit margins start shrinking as a result thereof. Yields don’t have to go up just because of higher economic growth expectations and that was arguably a pretty minimal effect on yield from 1980 to date.

          Marked as spam
          Posted by MachineGhost
          Answered on 05/08/2017 5:13 PM
            Private answer

            Higher wages don’t necessarily mean lower profits. If households earn more and net save less then profits will rise.

            Marked as spam
            Cullen Roche Posted by Cullen Roche
            Answered on 05/08/2017 5:52 PM
              Private answer

              I’m trying to get a handle on this too. It doesn’t work with my intuitions yet, so I must still be missing something.

              The US seems caught in a spiral of debt accumulation that will outpace gdp growth for the foreseeable future. Our deficits will be getting larger as the baby boomers retire out and health care and …. It seems like we’re about to start really bumping up debt, and it seems that the bigger it gets the faster it grows, right?

              Assuming that’s right so far, the only fix seems to be using fed/treasury trickiness to absorb that debt, which as I understand it generates tons of new dollars.

              I just don’t get how that doesn’t make for inflation? No matter what the current desire for dollars, if we throw out too many doesn’t that cause a loss of confidence in the currency? Does that kill the economy?

              Can you please explain what I’m missing.

              Marked as spam
              Posted by Mark Bradshaw
              Answered on 07/03/2017 10:55 PM
                Private answer

                I think the key story of our time is that the govt cannot do enough to overcome the many disinflationary forces at work in the US economy. Between tech changes, demographic trends and labor issues you have three huge trends pushing inflation lower. And we’re learning that the govt cannot create enough debt or policy to overcome these trends. So I think you need to look at things more broadly than simply saying “more debt = higher inflation”. There are other variables at work here and they’re exerting more pressure downward than the govt can exert upward….Will that change? It’s very hard for me to see how it changes. Especially with the deficit narrowing and the govt becoming more austere in many ways.

                Marked as spam
                Cullen Roche Posted by Cullen Roche
                Answered on 07/04/2017 2:12 AM
                  Private answer

                  But the cbo/gao is saying somewhat the opposite. They indicate a little bit of deficit narrowing for a short while, but then a big deficit ballooning due to social security and healthcare costs mostly. And “government” and “austere” in the same sentence is hard for me to process. Assume the deficit doesn’t narrow and the deficit just gets a little ridiculous. Do you still see the disinflationary forces counteracting that?

                  Marked as spam
                  Posted by Mark Bradshaw
                  Answered on 07/04/2017 7:41 AM
                    Private answer

                    It’s still hard for me to see how this is an issue. The deficit is about 3% of GDP. Inflation is running at 2%. We just ran a 5-10% deficit for 5+ years and it didn’t budge inflation higher. If that tells us anything it’s that the disinflationary forces are much stronger than the inflationary effect of the govt’s efforts.

                    I don’t see these big disinflationary trends subsiding any time soon. And while the deficit might increase it’s hard to see it blowing out to 10% again without a crisis. So I don’t see how this is a big concern going forward….

                    Marked as spam
                    Cullen Roche Posted by Cullen Roche
                    Answered on 07/04/2017 1:55 PM
                      Private answer
                      Marked as spam
                      Posted by Dennis
                      Answered on 07/04/2017 3:28 PM
                        Private answer

                        Thanks Cullen and Dennis. I’ll take a look at the book.

                        When the GAO or cbo say the current federal budget trajectory is unsustainable, are they just wrong in your opinion? Is there some debt level to GDP that worried you? Are all bets off if some other currency becomes the dominant reserve?

                        Marked as spam
                        Posted by Mark Bradshaw
                        Answered on 07/04/2017 3:39 PM
                          Private answer

                          I don’t really know what the CBO means. What does it mean for the debt to be “unsustainable”? Surely it doesn’t mean we can’t pay for it because the USA has a printing press. Does it mean it will cause inflation? I guess that would be problematic, but there is zero evidence that the high levels of govt debt are leading to high inflation. This is confirmed in places like Japan as well. So I am not so sure that the CBO can be trusted here as I am not even sure what they are concerned about….

                          Marked as spam
                          Cullen Roche Posted by Cullen Roche
                          Answered on 07/04/2017 3:41 PM
                            Private answer

                            I assume they mean inflation. That’s the best I could figure. I wonder if we eventually end up like Japan if we do have a debt balloon, and whether that has a happy ending. They seem to have made it work for a while but I wonder how long they can Keep the plates spinning but that’s where I want the informed opinion of people here because I’m out of my depth.

                            Marked as spam
                            Posted by Mark Bradshaw
                            Answered on 07/04/2017 3:48 PM
                              Private answer

                              With inflation running 2% and showing no signs of rising I don’t see what the worry is? I am generally of the view that you have to take the data for what it is and not what you think it will be so this data is confirmation that the deficit is not a problem. Will it become a problem? I don’t know. But let’s see a few quarters of 4%+ headline inflation and then start worrying about it. Until then, i don’t think we can conclude much if anything.

                              Marked as spam
                              Cullen Roche Posted by Cullen Roche
                              Answered on 07/04/2017 4:01 PM
                                Private answer

                                At some point in the future the interest payments due on previously outstanding issued debt will take up all of the transfer payments. That, for sure, is where the crutch would meet the road. No government has ever paid off all its issued debts with rare historical exceptions (and certainly not at the level we’re at now), so its either inflation or default to whittle away the real value. It’s hard to predict how or when because the free market’s confidence is what forces the government’s hand. Japan is a situation where the left pocket and the right pocket don’t have any gnarly interference in the middle, so it’s smooth sailing on the debt bubble seas so long as the confidence is maintained. And that confidence is uniquely homogeneously and monotonously cultural.

                                As long as the private sector grows faster than the government “crowding out” of productive resources each year, there should be no high rate of inflation. It’s subpar/poor utilization and accountability of productive resources paid for by “money printing” that causes unproductivity and high inflation. Now, granted, government is almost always and everywhere unproductive with its expropriated resources, but we’re not in a Big Government climate like 1940-1980 anymore. That Thatcher Revolution put on “austerity” under the guise of “increased accountability” to the taxpayer. Even if its been more rhetoric than actual fact, the perception pscyhe is what matters more than reality. The Republicans would have to give in and admit defeat to ever go back to the way it was before.

                                What’s bad for government via “austerity” isn’t necessarily an issue for free market innovative and productivity (just think of all the breakthroughs during the Great Depression when people had the time and weren’t caught up in the rat race to get ever richer). “Safe financial assets” or lack therefor is hardly the be all, end all of civilization continuing to evolve.

                                The thing about debt is that it becomes more fragile the larger it gets. It becomes more fragile because more and more people lose confidence about repayment along the way. It becomes a game of chicken to keep confidence afloat since you cannot stop as that would put the lie to the sham. So whenever/if this gets to a tipping point, you reach that “unsustainable” point the CBO is worried about. I don’t think its numbers and figures, its confidence. Honestly, unless we go the way of Communism again, there’s not going to be 100% expropriation of taxpayer resources where even that full amount is insufficient to pay off outstanding debt.

                                Marked as spam
                                Posted by MachineGhost
                                Answered on 07/05/2017 9:10 PM
                                  Private answer

                                  MG, there is so much wrong in that comment I am beginning to wonder if you actually read this website.

                                  First, there is no guarantee that the interest costs will rise to become the entirety of transfer payments. In fact, even though the national debt has risen substantially in the last 30 years the interest burden has fallen as a % of debt and GDP. There is nothing, absolutely nothing, stopping the govt from keeping rates near 0% and capping its interest costs in perpetuity.

                                  Second, no govt has ever “paid off” its debt because it’s literally impossible. You would extinguish every single safe non-govt asset including t-bills and notes. This would literally destroy the money markets. More importantly, it would require decades of surpluses which would be so contractionary with a current account deficit that it is impossible. It literally cannot and will not happen.

                                  Third, debt does not become more fragile as it gets larger. Debt becomes more fragile when more of it is issued by entities that are unlikely to pay it back. The housing crisis was an example where more debt led to fragility because the quality of that debt was shit. If, however, US banks made trillions in loans tomorrow to Warren Buffett and Bill Gates there would be no problem at all.

                                  You may want to review my biggest myths in economics. I feel like you don’t fully grasp these concepts.

                                  https://www.pragcap.com/biggest-myths-in-economics/

                                  Marked as spam
                                  Cullen Roche Posted by Cullen Roche
                                  Answered on 07/05/2017 9:20 PM
                                    Private answer

                                    Enjoyed your “biggest myths…” but some points are way too facile. You refer to trends in median expenditures over the years as cause for optimism using a single chart. What about the plight of the lower 25%? And why is percent spending an indicator of quality of life at all? That spending is capped by other necessities and woefully inadequate for good health and education. Sure, I’ll only spend 6% of my measly income for education at some fly-by-night trade school. I really think you should stop pointing to the prosperity of the poor to make your cases. Our society is sick and getting sicker.

                                    Curious about the concept of even-steven swap under QE. Are you saying swapping toxic MBS’s, not at true market value, for cash is not a net gain for banks?

                                    Curios. So the Fed could provide zero interest Treasuries forever to stop the exponential growth in interest (why ignoring private debt growth – must not be part of the economy – see https://www.nakedcapitalism.com/2016/09/the-private-debt-crisis.html). What is the difference between that and cash? I’d rather keep my money in my checking account than locked a 0% CD for some period. That ends the usefulness of govt securities relative to cash doesn’t it?

                                    Marked as spam
                                    Posted by Common Cents
                                    Answered on 07/12/2017 12:08 AM
                                      Private answer

                                      CC, when you have new questions it’s better to post them as new topics. This is getting really disorganized so I’m gonna close it.

                                      Marked as spam
                                      Cullen Roche Posted by Cullen Roche
                                      Answered on 07/12/2017 12:41 AM