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Question on Fed Debt

Cullen,

I have read all of your myth busters articles on the National Debt.  Can you expand upon something for me?  In one of your earlier articles you said that a $16T debt (or $40T if you add in unfunded liabilities) is not that scary when you look at the other side of the balance sheet which might have $150T in fossil fuel reserves and $7T in federal land holdings.

My question is, how are those sort of assets relevant in a discussion of the liabilities we owe since those are not able to be used to pay the promises we make each month to our citizens in the form of Medicare, Medicaid, Social Security etc.   Isn't that like me saying because I own a million dollar house that I can afford to go out and get a bunch of credit card debt?  The fact that I own that house does not assist me in paying my monthly minimum credit card payments.  What is important is the cash that is coming in and out of my household each month. And if it takes more $$ to service those monthly credit card bills than I have coming in then that is a problem eventually.  Unless of course I sell the house to pay for the credit cards.

 

I'll take a stab:  you are a currency user, while the federal government is a currency issuer.  The federal government can issue more currency and/or borrow more money (issue more Treasury bills, notes, and bonds) - so far, without much trouble, because the global financial markets have confidence in our federal government's ability to be a reasonably prudent currency issuer/borrower.  We have a gigantic, productive, growing economy (growing most of the time) - the federal government does control significant fossil fuel reserves, and (of course) can tax our incomes each and every year to keep the cash flow going.  You - with your $1 million dollar house can get a home equity loan, but you can't collect taxes from your neighbors to help you make loan payments.

Hi @jalanlong,

Steve's answer is very good. I would only add that the US govt has the ability to tax the most productive private sector in the world. So their potential income stream is extremely valuable and trustworthy. This is the main reason why they're the world's reserve currency. This could change of course. And if it does then we might expect inflation to rise some and perhaps even a lot. But I don't see this as a big risk at present.

So, I guess the real question at this time is where does the govt's debt become a big problem? I don't think anyone knows. But so far it's pretty clear that the US has a great capacity to borrow and issue more debt without it causing high inflation.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

@Cullen-Roche said:

"... the US govt has the ability to tax the most productive private sector in the world. So their potential income stream is extremely valuable and trustworthy. "

Isn't this the answer to the question of: "...where does the govt's debt become a big problem?", hence, when the private sector is no longer the most productive (perhaps vs. China / Europe)?

 

I wouldn't worry much about Europe becoming the most productive - most of Europe has been sclerotic in terms of economic growth for a few decades.  China is a different story, although they still have hundreds of millions of very poor citizens.