Really excellent in-depth explainer. I knew most of what is here, but it’s put clearly, succinctly, compellingly, and all in one place in a way that I haven’t had before. This is going to be the #1 place I point people if I talk to them about the debt crisis.
This was the best synthesis of our debt crisis I have seen in years, and a good reminder of how much worse the situation is now than it was in the 2010s (when it was already deeply concerning). It seems clear that, assuming we cannot grow our way out of the debt with AI-derived productivity growth, we will need some sort of Simpson-Bowles 2.0 solution, with far deeper cuts and far larger tax hikes, in an environment that is probably even more partisan than it was in 2011 and certainly more resistant to entitlement reform (even, now, among a few Republican Reps/Senators). It’s frustrating that the public has become less interested in resolving this crisis as it has become more imminent.
It seems to me that one problem with growing our way out of the debt is that this would only serve to kick the can down the road. I would guess that a period of robust GDP growth would just be a good excuse to ignore existing problems and even add more, making any future downturn even worse?
This link should be good. I’ve head him say this several times over the years, highly recommend listening to this Odd Lots episode from April 2025 (Chanos talks about it toward the end, around the 35-min mark).
Where does trade fit into this picture? My simplified understanding has been that budget deficits essentially finance trade deficits, as we export debt instead of products.
Yeah that’s valid. Our capital account surplus offsets the trade deficit. Many believe that, to your point, the widening gap has facilitated complacency over the decades in Washington with respect to debt and deficits. I’d agree. It isn’t binding yet, but we’re increasingly vulnerable to a run on the dollar, especially in a world where new bi- and multi-lateral trade relationships are formed that exclude the US.
So this is rich analysis, and there's much to be said. But at a high level, I feel like there's a pessimistic bias. Considerations that point the other way are omitted, such as:
1. In the 1990s, we ran fiscal surpluses. Politics wasn't too biased against tax hikes + spending restraint in that case.
2. In the 2010s, when soaring deficits really became habitual, they made macroeconomic sense. Interest rates were so low that the economy had a Zero Lower Bound problem.
3. The deficit surge in 2020-21 was pandemic-driven; a special case.
4. The productivity boom we need shows signs of happening, and with little help from public investment.
5. Current immigration policy is incredibly evil and idiotic, and if we don't reverse the recent turn to the Dark Side, we *deserve* to be macroeconomically crushed ... BUT it looks politically unsustainable. It's unpopular, and the people of Minneapolis already seem to have broken the crackdown's momentum, and shown the limits of the American people's willingness to tolerate the destruction of the heritage of freedom for the sake of hating on illegal immigrants. There's no need to treat sadomasochist immigration policy as a permanent fait accompli.
I also find #12 to be undertheorized. The US military doesn't force people to use the dollar as a reserve currency. How is this "proof of violence" mechanism supposed to work? Of course, if Trump's geopolitical shenanigans stir up World War III, and we lose, then there could be a lot of trouble ahead for US debt. But the monetary and military ascendancies are not as entangled as that.
Thanks for the thoughtful comment, Nathan. Yes, honestly, it is hard to be optimistic! I see very little sense of urgency in Washington or among voters relative to how existential the problems are.
On #1 and #2: both are real, but both are exceptional. The 1990s surpluses needed a peace dividend, a productivity boom, capital-gains revenue from a stock bubble, etc. all firing at once. The 2010s deficits long outlasted the zero-lower-bound conditions that gave them their macro case. The Buchanan-Wagner-style political bias toward deficits is the more durable pattern than either decade-specific episode.
On #3: I'd push further than the piece does. The pandemic framing absorbs blame for the deficit overshoot. The meaningful policy error was the American Rescue Plan in March 2021, by then the recovery was already underway, and the Biden admin pushed an additional $1.9T mostly to satisfy a political demand for New Deal-scale ambition. It was reckless. Summers and Blanchard flagged the inflation risk in real time and were proven right.
On #4: directionally agreed, and the prescription you imply — get out of the way and let the investment flourish — is the hope, but proceduralism and the vetocracy loom. There's a noticeable degrowther, anti-AI movement burgeoning it seems.
On #5: I read the politics less optimistically. Neither party is running on a meaningfully pro-immigration platform. The Democratic coalition seems more likely to moderate rightward on immigration through 2028 than to recover a pro-mobility consensus. I'd be glad if I'm wrong.
On #12: the under-theorization charge is fair. Probably should have substantiated it further. Like many of the individual ground truths, this one is worthy of a standalone article, lol. Anyway, the "proof of violence" claim isn't direct coercion, nobody's forced at gunpoint.
The structural fact is that US security guarantees, the alliance system, and the open trade order they sustain make dollar invoicing and dollar reserves the rational default for allies. And the empirics on this are sharper than we let on in the piece.
Eichengreen et al's "Mars or Mercury?" (2019) finds that military alliances raise a currency's reserve share in an ally's holdings by about 30% controlling for size, credibility, and trade depth. The Fed's own IFDP work finds that roughly 3/4ths of foreign government holdings of safe US assets are by countries with some military tie to the US. During COVID, US military allies were nearly 50% more likely to get a Fed swap line than non-allies — dollar liquidity itself is rationed along security lines. The 2022 Russia case made it operational in real time, crossing the security line cost Russia its dollar holdings.
Happy to provide these sources... Ken Rogoff also puts it crisply in his recent book: "the dollar and the military are inseparably linked — military power underpins trust in the currency, while the dollar's privileges make it easier to finance that power." So no World War III required. The security and monetary ascendancies are a single structural system in peacetime, and the numbers are large enough that I think the framing in #12 holds up.
1) I think we should just assume that federal tax revenues are going to be around 17.5% of GDP no matter what we do. If we are having a booming economy they may get as high as 20%, if we are in a deep recession 15%. 90% of the time they are going to be around the middle no matter what we do with taxes.
2) State & Local taxes are higher today then they have been in the past.
3) 17.5% is not enough to fund entitlements.
4) Politically and morally we are not going to add a VAT to fund bloated retirements.
5) Either entitlements are going to get cut or we will have a fiscal crisis. My bet is on fiscal crisis.
I don't see why assuming tax revenue stays at 17.5% of GDP is warranted. You'd essentially have to prove that the federal government is somehow incapable of raising more revenue, which doesn't make much sense: even when we take into account state and local taxes, the United States raises far less revenue as a % of GDP than other rich countries.
1) Federal tax receipts have been between 15-20% for the entire post war period, whether taxes were 90% of Reagan lows. Mostly they were around 17-18%, but can reach the extremes during deep recessions (housing crisis) or euphoric bubbles (2000 tech bubble).
2) The US can only close the gap with the more generous OECD welfare states by implementing a VAT. A VAT is politically unpopular and regressive. When most OECD countries that implemented a VAT did so it was decades ago and tied to benefits for middle class prime age workers (basically, the middle class paying taxes to itself).
Imagine trying to sell a VAT along the lines of "we are going to increase the cost of everything 20% so boomers can continue to be super rich and own everything."
I agree that this is the historical trend, but I don't see why it should be taken as a historical constant. As the article above points out, one reason the tax take shifts between 15% and 20% is that the federal government repeatedly cuts taxes while being oblivious to the fiscal consequences: a government that didn't enact the Bush and Trump tax cuts would see less volatility and higher average receipts. Another reason is that the U.S. has one of the most progressive income tax schedules in the developed world: most other countries have higher taxes for households further down the income ladder, and I find it highly unlikely that tax increases on those income thresholds would generate negligible revenues. Finally, the U.S. has a rather regressive federalist setup where state and local governments raise a considerably high share of the total revenue generated. If we opted to shift this balance so that the central government raised more revenue (imagine "abolish state and local taxes" as a campaign slogan), the federal government would have more fiscal room to maneuver.
Also, I reject the notion that "super-rich" boomers are the cause of our fiscal problems. This ignores the idiotic Bush and Trump tax cut schemes, as well as the fiscal boondoggles in the War on Terror. It also ignores the absolutely nightmarish inefficiency of our healthcare sector, whose share of GDP is much higher than that of other nations.
"the article above points out, one reason the tax take shifts between 15% and 20% is that the federal government repeatedly cuts taxes while being oblivious to the fiscal consequences"
The article is not correct in this assertion. That's not the way to read the data. Marginal tax rates on the rich could be 90% and it wouldn't matter. Throughout the 1950s taxes never exceeded 18% despite practically 100% tax rates. In fact if you take out the dot.com boom they literally can't get higher then 18% or so.
The only meaningful cause for fluctuations in the 15-20% range is overall economic conditions. When the economy is booming capital gains taxes are high and unemployment is low. When it's in recession the opposite is true. But these extremes just average out.
1) The worst fiscal event of my lifetime was COVID, which cost 30% of GDP. Democrats did that and should be mass executed for the crime.
2) All tax cuts are completely horseshit compared to entitlements.
3) I work in the healthcare sector and inefficiency is the point. DO you think democrats WANT the healthcare sector to be efficient? How many people that vote for them make their living off it being inefficient!
4) I support tax cuts for people like me because I have no confidence in our society, know that any tax increase will be used as giveaways to people not like me, and assume it will have a fiscal crisis and what matters is that me and people like me are in a better position to face it.
Interesting article, but I think you overstate how high the hurdle is for "solving" the problem. The U.S. government (and most other governments and for-profit corporate entities) don't have an inherent lifespan and therefore don't have to "pay off" their debts completely: in fact, doing so could trigger a financial crisis (https://www.americanheritage.com/andy-jackson-and-perils-surplus).
All we really have to do is stabilize the debt-to-GDP ratio, preferably at or below 100%. To do that, we'd need to reduce annual deficits to below the long-run rate of economic growth, and after that, the twin forces of inflation and economic growth will reduce the debt in relative terms. We'd need to go from running deficits of 6-7% of GDP to 2-3%. I'm not saying it's a walk in the park, but it's definitely doable.
Fair. Still see no signs of things moving in the right direction. Nor does it seem there's a durable political coalition for whom debt/deficit (relative) hawkishness is part of the platform.
Will check it out over the weekend! No rules against us giving feedback before the deadline, what we're really concerned about is just having the best ideas/solutions possible surface
My only comment is I’d suggest you look at spending and revenue in inflation adjusted per capita dollars. There is no reason for spending to expand faster than this. And it paints a shockingly different picture than you one you have shown.
Imagine a world where capital flows freely and the US decided to stop paying interest on its government bonds… do we really need to ask why this hasn’t been done?
"Capital flows freely" describes an environment, not a mechanism. Are you predicting FX adjustment, portfolio reallocation, collateral disruption, or something else specifically?
It’s a de facto default for a sovereign to stop paying interest on its debt. Yes, FX adjustment and collateral disruption immediately. Portfolio reallocation to follow. Inflation expectations then become unanchored.
Instead of asking why it hasn’t been done, let me ask you: why would the US want to do it?
You refer to Ferguson's ratio and make a legitimate complaint about resource diversion.
The rest of Part 1 is a series of contradictions rooted in a misunderstanding of US debt interest payments. These interest payments are part of deficit spending and is a severely regressive fiscal policy that gives money to people in proportion to the money that they already have.
In paragraph two you say "...theoretically, print money to meet its obligations..." and "The crowding-out effect — where debt servicing takes funds away from investment in defense...".
A currency issuing government's ability to meet its obligations is not theoretical. It is proven in the description. A currency issuing government, by definition, can issue currency to meet its obligations and "invest" in defense.
That’s right. Because our central bank has a strong semblance of responsibility and adherence to its mandate, it has chosen not to print money into oblivion.
The description of the monetary sequence and its issuing characteristics are separate from any policy uses.
How does issuing currency for interest prevent issuance for defense? Is there a ratio, that if breached, prevents one or the other? Please ignore the question of whether or not an amount for either is a good idea.
There is a theoretical cap on how much money can be printed in general for all of the above purposes. Because Treasury cannot literally just make the number go up in the TGA, they are required to issue bonds to fund spending. The cap on issuances is something the bond market determines. And by “cap”, I mean the threshold at which demand for Treasuries becomes fleeting as the risk-adjusted returns start to look better elsewhere from the US. This - a failed Treasury auction - is what would start the chain reaction resulting in runaway interest rates across the Treasury yield curve. Remember, the Fed doesn’t set 10 year rates…
For decades now we have heard about the fiscal cliff. It's always near but never reached. Isn't the amount of Treasuries sold determined only by the USD, already issued and in existence, to buy them?
No, it is determined by global demand, not just the supply of dollars in circulation. Demand for Treasuries *is* what, in large part, underpins the value of the USD. None of our institutions are in the explicit business of exchange rate management. In other words, hold the supply of dollars constant, and the value of the USD moves in tandem with global demand for dollar-denominated assets.
To your first point about hearing of the fiscal cliff for decades: does cautioning before the problem is existential nullify caution's validity?
If there was no supply of USD to buy a Treasury then how would a Treasury be bought?
Doesn't the Fed get together every now and then and vote on interest rates?
We could stop all Treasury issuance today and it would have no effect on whether the country could pay its bills. It would, however ,end highly regressive interest payments.
Fiscal cliff concerns is a fear of "large" numbers and axiomatic ratios.
Really excellent in-depth explainer. I knew most of what is here, but it’s put clearly, succinctly, compellingly, and all in one place in a way that I haven’t had before. This is going to be the #1 place I point people if I talk to them about the debt crisis.
Awesome to hear. Thanks Reid, I hope you’re cooking up a good idea on how we fix it all!!
This was the best synthesis of our debt crisis I have seen in years, and a good reminder of how much worse the situation is now than it was in the 2010s (when it was already deeply concerning). It seems clear that, assuming we cannot grow our way out of the debt with AI-derived productivity growth, we will need some sort of Simpson-Bowles 2.0 solution, with far deeper cuts and far larger tax hikes, in an environment that is probably even more partisan than it was in 2011 and certainly more resistant to entitlement reform (even, now, among a few Republican Reps/Senators). It’s frustrating that the public has become less interested in resolving this crisis as it has become more imminent.
Really enlightening, and pretty sobering as well.
It seems to me that one problem with growing our way out of the debt is that this would only serve to kick the can down the road. I would guess that a period of robust GDP growth would just be a good excuse to ignore existing problems and even add more, making any future downturn even worse?
Oof, the cynic in me would probably tend to agree
Also the link for "Golden Age of Fraud" seems to be broken
https://www.youtube.com/watch?v=ZtIcQA-IJ9s
This link should be good. I’ve head him say this several times over the years, highly recommend listening to this Odd Lots episode from April 2025 (Chanos talks about it toward the end, around the 35-min mark).
Where does trade fit into this picture? My simplified understanding has been that budget deficits essentially finance trade deficits, as we export debt instead of products.
Yeah that’s valid. Our capital account surplus offsets the trade deficit. Many believe that, to your point, the widening gap has facilitated complacency over the decades in Washington with respect to debt and deficits. I’d agree. It isn’t binding yet, but we’re increasingly vulnerable to a run on the dollar, especially in a world where new bi- and multi-lateral trade relationships are formed that exclude the US.
So this is rich analysis, and there's much to be said. But at a high level, I feel like there's a pessimistic bias. Considerations that point the other way are omitted, such as:
1. In the 1990s, we ran fiscal surpluses. Politics wasn't too biased against tax hikes + spending restraint in that case.
2. In the 2010s, when soaring deficits really became habitual, they made macroeconomic sense. Interest rates were so low that the economy had a Zero Lower Bound problem.
3. The deficit surge in 2020-21 was pandemic-driven; a special case.
4. The productivity boom we need shows signs of happening, and with little help from public investment.
5. Current immigration policy is incredibly evil and idiotic, and if we don't reverse the recent turn to the Dark Side, we *deserve* to be macroeconomically crushed ... BUT it looks politically unsustainable. It's unpopular, and the people of Minneapolis already seem to have broken the crackdown's momentum, and shown the limits of the American people's willingness to tolerate the destruction of the heritage of freedom for the sake of hating on illegal immigrants. There's no need to treat sadomasochist immigration policy as a permanent fait accompli.
I also find #12 to be undertheorized. The US military doesn't force people to use the dollar as a reserve currency. How is this "proof of violence" mechanism supposed to work? Of course, if Trump's geopolitical shenanigans stir up World War III, and we lose, then there could be a lot of trouble ahead for US debt. But the monetary and military ascendancies are not as entangled as that.
Thanks for the thoughtful comment, Nathan. Yes, honestly, it is hard to be optimistic! I see very little sense of urgency in Washington or among voters relative to how existential the problems are.
On #1 and #2: both are real, but both are exceptional. The 1990s surpluses needed a peace dividend, a productivity boom, capital-gains revenue from a stock bubble, etc. all firing at once. The 2010s deficits long outlasted the zero-lower-bound conditions that gave them their macro case. The Buchanan-Wagner-style political bias toward deficits is the more durable pattern than either decade-specific episode.
On #3: I'd push further than the piece does. The pandemic framing absorbs blame for the deficit overshoot. The meaningful policy error was the American Rescue Plan in March 2021, by then the recovery was already underway, and the Biden admin pushed an additional $1.9T mostly to satisfy a political demand for New Deal-scale ambition. It was reckless. Summers and Blanchard flagged the inflation risk in real time and were proven right.
On #4: directionally agreed, and the prescription you imply — get out of the way and let the investment flourish — is the hope, but proceduralism and the vetocracy loom. There's a noticeable degrowther, anti-AI movement burgeoning it seems.
On #5: I read the politics less optimistically. Neither party is running on a meaningfully pro-immigration platform. The Democratic coalition seems more likely to moderate rightward on immigration through 2028 than to recover a pro-mobility consensus. I'd be glad if I'm wrong.
On #12: the under-theorization charge is fair. Probably should have substantiated it further. Like many of the individual ground truths, this one is worthy of a standalone article, lol. Anyway, the "proof of violence" claim isn't direct coercion, nobody's forced at gunpoint.
The structural fact is that US security guarantees, the alliance system, and the open trade order they sustain make dollar invoicing and dollar reserves the rational default for allies. And the empirics on this are sharper than we let on in the piece.
Eichengreen et al's "Mars or Mercury?" (2019) finds that military alliances raise a currency's reserve share in an ally's holdings by about 30% controlling for size, credibility, and trade depth. The Fed's own IFDP work finds that roughly 3/4ths of foreign government holdings of safe US assets are by countries with some military tie to the US. During COVID, US military allies were nearly 50% more likely to get a Fed swap line than non-allies — dollar liquidity itself is rationed along security lines. The 2022 Russia case made it operational in real time, crossing the security line cost Russia its dollar holdings.
Happy to provide these sources... Ken Rogoff also puts it crisply in his recent book: "the dollar and the military are inseparably linked — military power underpins trust in the currency, while the dollar's privileges make it easier to finance that power." So no World War III required. The security and monetary ascendancies are a single structural system in peacetime, and the numbers are large enough that I think the framing in #12 holds up.
1) I think we should just assume that federal tax revenues are going to be around 17.5% of GDP no matter what we do. If we are having a booming economy they may get as high as 20%, if we are in a deep recession 15%. 90% of the time they are going to be around the middle no matter what we do with taxes.
2) State & Local taxes are higher today then they have been in the past.
3) 17.5% is not enough to fund entitlements.
4) Politically and morally we are not going to add a VAT to fund bloated retirements.
5) Either entitlements are going to get cut or we will have a fiscal crisis. My bet is on fiscal crisis.
I don't see why assuming tax revenue stays at 17.5% of GDP is warranted. You'd essentially have to prove that the federal government is somehow incapable of raising more revenue, which doesn't make much sense: even when we take into account state and local taxes, the United States raises far less revenue as a % of GDP than other rich countries.
https://taxpolicycenter.org/statistics/oecd-taxes-share-gdp
1) Federal tax receipts have been between 15-20% for the entire post war period, whether taxes were 90% of Reagan lows. Mostly they were around 17-18%, but can reach the extremes during deep recessions (housing crisis) or euphoric bubbles (2000 tech bubble).
2) The US can only close the gap with the more generous OECD welfare states by implementing a VAT. A VAT is politically unpopular and regressive. When most OECD countries that implemented a VAT did so it was decades ago and tied to benefits for middle class prime age workers (basically, the middle class paying taxes to itself).
Imagine trying to sell a VAT along the lines of "we are going to increase the cost of everything 20% so boomers can continue to be super rich and own everything."
I agree that this is the historical trend, but I don't see why it should be taken as a historical constant. As the article above points out, one reason the tax take shifts between 15% and 20% is that the federal government repeatedly cuts taxes while being oblivious to the fiscal consequences: a government that didn't enact the Bush and Trump tax cuts would see less volatility and higher average receipts. Another reason is that the U.S. has one of the most progressive income tax schedules in the developed world: most other countries have higher taxes for households further down the income ladder, and I find it highly unlikely that tax increases on those income thresholds would generate negligible revenues. Finally, the U.S. has a rather regressive federalist setup where state and local governments raise a considerably high share of the total revenue generated. If we opted to shift this balance so that the central government raised more revenue (imagine "abolish state and local taxes" as a campaign slogan), the federal government would have more fiscal room to maneuver.
Also, I reject the notion that "super-rich" boomers are the cause of our fiscal problems. This ignores the idiotic Bush and Trump tax cut schemes, as well as the fiscal boondoggles in the War on Terror. It also ignores the absolutely nightmarish inefficiency of our healthcare sector, whose share of GDP is much higher than that of other nations.
"the article above points out, one reason the tax take shifts between 15% and 20% is that the federal government repeatedly cuts taxes while being oblivious to the fiscal consequences"
The article is not correct in this assertion. That's not the way to read the data. Marginal tax rates on the rich could be 90% and it wouldn't matter. Throughout the 1950s taxes never exceeded 18% despite practically 100% tax rates. In fact if you take out the dot.com boom they literally can't get higher then 18% or so.
The only meaningful cause for fluctuations in the 15-20% range is overall economic conditions. When the economy is booming capital gains taxes are high and unemployment is low. When it's in recession the opposite is true. But these extremes just average out.
1) The worst fiscal event of my lifetime was COVID, which cost 30% of GDP. Democrats did that and should be mass executed for the crime.
2) All tax cuts are completely horseshit compared to entitlements.
3) I work in the healthcare sector and inefficiency is the point. DO you think democrats WANT the healthcare sector to be efficient? How many people that vote for them make their living off it being inefficient!
4) I support tax cuts for people like me because I have no confidence in our society, know that any tax increase will be used as giveaways to people not like me, and assume it will have a fiscal crisis and what matters is that me and people like me are in a better position to face it.
Interesting article, but I think you overstate how high the hurdle is for "solving" the problem. The U.S. government (and most other governments and for-profit corporate entities) don't have an inherent lifespan and therefore don't have to "pay off" their debts completely: in fact, doing so could trigger a financial crisis (https://www.americanheritage.com/andy-jackson-and-perils-surplus).
All we really have to do is stabilize the debt-to-GDP ratio, preferably at or below 100%. To do that, we'd need to reduce annual deficits to below the long-run rate of economic growth, and after that, the twin forces of inflation and economic growth will reduce the debt in relative terms. We'd need to go from running deficits of 6-7% of GDP to 2-3%. I'm not saying it's a walk in the park, but it's definitely doable.
Fair. Still see no signs of things moving in the right direction. Nor does it seem there's a durable political coalition for whom debt/deficit (relative) hawkishness is part of the platform.
Just finished my submission for this essay contest! Might have to make some updates after reading this post and seeing all these juicy charts though…
https://www.grantvarner.com/p/how-does-america-escape-its-fiscal?r=3221f1&utm_campaign=post&utm_medium=web
Awesome! Looking forward to reading it
Thanks! Not sure if this is against the rules, would love your feedback on it so I can continue to refine my ideas
From an objective lens, I think where my essay falls short is on proposing actual concrete policies. But the thesis is:
1. Running up a deficit is a burden of having the reserve currency
2. What a country runs up a deficit on matters (military spending = good)
3. The Gen Z/Gen Alpha demographic is paving the way to start rolling back social benefits
Will check it out over the weekend! No rules against us giving feedback before the deadline, what we're really concerned about is just having the best ideas/solutions possible surface
My only comment is I’d suggest you look at spending and revenue in inflation adjusted per capita dollars. There is no reason for spending to expand faster than this. And it paints a shockingly different picture than you one you have shown.
Paying interest on $ savings is a policy choice.
Ask yourself why the US does it
Imagine a world where capital flows freely and the US decided to stop paying interest on its government bonds… do we really need to ask why this hasn’t been done?
"Capital flows freely" describes an environment, not a mechanism. Are you predicting FX adjustment, portfolio reallocation, collateral disruption, or something else specifically?
It’s a de facto default for a sovereign to stop paying interest on its debt. Yes, FX adjustment and collateral disruption immediately. Portfolio reallocation to follow. Inflation expectations then become unanchored.
Instead of asking why it hasn’t been done, let me ask you: why would the US want to do it?
Just not issuing more above zero - not not paying off the old ones
Part I: Fiscal Reality Check
Greetings
You refer to Ferguson's ratio and make a legitimate complaint about resource diversion.
The rest of Part 1 is a series of contradictions rooted in a misunderstanding of US debt interest payments. These interest payments are part of deficit spending and is a severely regressive fiscal policy that gives money to people in proportion to the money that they already have.
In paragraph two you say "...theoretically, print money to meet its obligations..." and "The crowding-out effect — where debt servicing takes funds away from investment in defense...".
A currency issuing government's ability to meet its obligations is not theoretical. It is proven in the description. A currency issuing government, by definition, can issue currency to meet its obligations and "invest" in defense.
That’s right. Because our central bank has a strong semblance of responsibility and adherence to its mandate, it has chosen not to print money into oblivion.
Thanks for the reply.
The description of the monetary sequence and its issuing characteristics are separate from any policy uses.
How does issuing currency for interest prevent issuance for defense? Is there a ratio, that if breached, prevents one or the other? Please ignore the question of whether or not an amount for either is a good idea.
There is a theoretical cap on how much money can be printed in general for all of the above purposes. Because Treasury cannot literally just make the number go up in the TGA, they are required to issue bonds to fund spending. The cap on issuances is something the bond market determines. And by “cap”, I mean the threshold at which demand for Treasuries becomes fleeting as the risk-adjusted returns start to look better elsewhere from the US. This - a failed Treasury auction - is what would start the chain reaction resulting in runaway interest rates across the Treasury yield curve. Remember, the Fed doesn’t set 10 year rates…
For decades now we have heard about the fiscal cliff. It's always near but never reached. Isn't the amount of Treasuries sold determined only by the USD, already issued and in existence, to buy them?
No, it is determined by global demand, not just the supply of dollars in circulation. Demand for Treasuries *is* what, in large part, underpins the value of the USD. None of our institutions are in the explicit business of exchange rate management. In other words, hold the supply of dollars constant, and the value of the USD moves in tandem with global demand for dollar-denominated assets.
To your first point about hearing of the fiscal cliff for decades: does cautioning before the problem is existential nullify caution's validity?
If there was no supply of USD to buy a Treasury then how would a Treasury be bought?
Doesn't the Fed get together every now and then and vote on interest rates?
We could stop all Treasury issuance today and it would have no effect on whether the country could pay its bills. It would, however ,end highly regressive interest payments.
Fiscal cliff concerns is a fear of "large" numbers and axiomatic ratios.
"demographic replenishment"