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Can the US always service its debt?

I wondered if there is a situation when a sovereign government would not be able to service its own debt in its own currency? If inflation become very high and interest rates  also followed. What if the interest on government debt was higher than the amount received in taxes?

Hi @jon,

The govt can always print money. "Sovereign" is a slippery time. It's kinda like referring to a corporation as "solvent". When is a firm solvent or insolvent? Is a firm selling junk bonds "solvent"? Is a penny stock company "solvent" even if they're not technically bankrupt? It's a legal distinction that doesn't really apply to govts because govts don't typically default in legal terms.

IMO when a country is experiencing very high inflation their currency is being rejected in a manner that deems them technically insolvent. That is, after all, all insolvency is. It's when there's very low demand or zero demand for your liabilities.

So yeah, the govt printing press never breaks, but that doesn't mean that printing cures all.

Hello @cullen-roche,

What do you think a government would do in a situation where their interest on bonds exceeded the amount they received in taxes?

Would they create new bonds to pay for interest payments on existing bonds or would the central bank just buy the bonds up because any interest the cb receives goes back to the treasury?

This looks problematic in an inflationary environment. If the central bank wanted to keep interest rates high they wouldn't be buying bonds because that would put downward pressure on rates but if the treasury just started creating new bonds to pay for existing bond interest this would also be inflationary. How would they get out of this situation?

Hi @jon,

The US govt earns about 4T in tax revenue per year. So interest rates would have to be about 14% for the interest expense to exceed the revenues. That’s not gonna happen. At least not any time soon....

But, if it was happening I can guarantee you that the system is screwed. 🙂

Hi @cullen-roche,

I guess if government has reached a point of 14% rates then they have already failed at keeping inflation low. The main worry would not be how to pay for interest payments but how do we get this inflation under control.

Interest in 2020 were around 345B. (1.6% of GDP)

The debt never has to be repaid (perpetually roll to new debt)...only the interest need to.

Like Cullen said, won't happen anytime soon...

"From 1946 to 2021 is 75 years. In 63 of those years the UK government borrowed. In 12 it repaid debt. Total borrowing will have been £2,174bn. Repayments have been £38bn. So, for every £1 borrowed 1.7p has been repaid. In that case what is the debt repayment obsession all about?”

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