The U.S. Debt Ceiling Expired on March 1 and Nobody Cared – But They Will | Hacker News Reader

The U.S. Debt Ceiling Expired on March 1 and Nobody Cared – But They Will

forbes.com

46 pointsohiovr37 comments

Debt is worth it if you think your economy is going to grow in the future. It multiplies growth of an economy. Unfortunately, this multiplier is a double edged sword, during times of shrinkage.

Most modern economies have done well with debt since WW2 because the economy has been growing on average. During times of economic expansion, countries who don't put on more debt get left behind during the boom. The bust hurts those who took more risks, but it seems like on average it has worked out well for the debt takers in the last few generations.

Debt that must be repaid by a future generation (or just by other people under a different administration) will _always_ be worth it to the borrower.

This truth can lead to frivolous borrowing that does not in the least benefit those who must pay back the debt.

At least in theory. In practice, I guess things seem to be pretty ok for Japan in spite of their mountain of debt and shrinking population?

The thinking about debt being repaid by a future generation is deeply misleading because government debt is an asset to the private sector and those treasury bills are largely owned by US citizens (directly or indirectly, e.g. via pension funds).

So it's not that the debt has to be repaid by a future generation. Rather, the debt causes the government to indirectly cause transfer payments among the future generation, from those who don't own US treasuries to those who do. Put differently, the debt is a vehicle for perpetuating the current social stratification (who's rich and who's poor) into future generations.

If you're genuinely and honestly worried about the effect that the debt has on future generations, then your answer has to be some combination of (a) wealth tax and (b) moving the country's pension systems away from asset-backed pensions towards pay-as-you-go / transfer systems. (Though presumably combining this with a socially owned social wealth fund would work as well.)

Thank you for this.

I don't think you've told the whole story here - for example, when it comes time for the government to pay the future debt they can do it by raising taxes on one part of the population or the other, or simply by printing money (leading to inflation) and not all of those solutions work out the same way for any given person.

Even so, you've shown me a more sophisticated way to think about this issue and I'll surely end up having different, better founded opinions as a result.

Inflation is itself a form of transfer payment - from creditors to debtors, and from people in markets with no pricing power (high competition) to people with high pricing power (no competition), and from cash-holders to asset-holders. You're right that this has very different winners & losers than just paying interest on the debt, but it's the same general principle: government debt and money itself are both fictions, so the only way they can influence aggregate welfare is if they disincentivize productive work.

Thank you. That is indeed insightful. I've also held the same opinion as the parent comment and this helps me understand the intricacies of economics a little better

My thanks in the sibling to this comment still stand.

However, some of my original concern stands too. To quote myself:

    "Debt that must be repaid by a future generation [...] will _always_ be worth it to the borrower."

The concern is that the public debt may tend to balloon to a point where the only means to service that debt involves hyperinflation and then the nation faces a choice between economic meltdown due to catastrophic inflation or economic meltdown due to defaulting on its debt. Or maybe that can be avoided if people muster the will to enact some kind of crazy austerity measures in the 11th hour but that could be awful too.

A wealth tax can ensure that everyone is just about equally bad at surviving the ensuing chaos rather than having a few elites who make out somewhat better than everyone else when it all goes down. But it won't avert the chaos altogether, will it?

Is this concern totally ill founded?

Servicing the debt usually just means paying interest on it and rolling it over. That's not going to cause hyperinflation.

One hypothetical scenario that goes into this direction though would be a severe supply shortage that drives prices up, and then wealthier folks (who are the holders of the debt) are able to price poorer folks out of the market.

I don't think that in itself would give you hyperinflation though. Something else would have to happen as well,[0] and then the question is down to the nature of where this extreme supply shortage comes from. The most common cause of that kind of thing is war, and in war societies tend to suspend some aspects of the free market and introduce rationing to deal with these issues.

[0] For example, consider the early Weimar republic where the government basically decided to cause hyperinflation because the alternative was to refuse payment of war reparations, and that wasn't politically feasible until the hyperinflation made it painfully obvious to everybody (both domestic and abroad) that Germany had to be allowed to at least partially default on those reparations. The point is, hyperinflation only happened because the government decided to keep injecting ever larger amounts of money into the economy -- but that can't be caused by existing debt. The existing debt is limited, so it could push on inflation for some time, but once that inflation has devalued the debt sufficiently, its "inflationary fuel" is spent. So I don't think existing debt can cause hyperinflation all by itself.

The "hyper" part of hyperinflation often comes about through information cascades in the populace itself, not through anything the government does. If a critical mass of the population believes that money will be worth less tomorrow than it is today, they will change their behavior to get rid of all their money now rather than risking it becoming worthless tomorrow. This shows up as an increase in the velocity of money, the number of times a given dollar turns over. The money supply equation is MV = PQ (money supply * velocity of money = average price level * quantity of goods sold), so if V goes up while M and Q remain constant, P has to go up too. This pushes inflation expectations up even further, which causes further increases in the velocity of money, which creates a runaway feedback loop. That's how you get hyperinflation.

While there is flexibility in V, there is simply not enough leeway there for hyperinflation -- in hyperinflation you typically get an increase of prices by a factor of 1000000 or more. There's no way V can increase by that much. Consider salaries, for example. You can pay people daily instead of every two or four weeks, but that only gives you a factor 10 or ~20 (depending on what your baseline is). To get a factor of 1000 in the velocity of money, you'd have to give people their paycheck every 5 minutes or so and they'd have to immediately spend it. Getting to 1000000 is physically impossible.

So hyperinflation can only happen when there's something that keeps injecting more money into the system, typically a combination of bank loans and government spending.

Of course, the root cause of the hyperinflation isn't either of those things but some underlying economic problem (e.g. war reparations and Ruhr occupation in the case of the Weimar republic hyperinflation, a totally botched land reform in the case of the Zimbabwe hyperinflation).

But the point is that if there's nothing that keeps injecting money into the system, the hyperinflation necessarily comes to a screeching halt.

Edit: Of course there's a psychological aspect to it as well. Most cases of hyperinflation have a runup of very high inflation, and them some inflection point where things really take off. I've never read a really good study of what precisely causes these inflection points. I imagine it's some kind of policy change that is enabled by those psychological aspects. Whatever it is, the hyperinflation doesn't last long after those inflection points because that's when it becomes really obvious that things can't continue that way and the injection of money must stop.

Oftentimes the run-up in M needed to maintain hyperinflation comes from the need to maintain the loyalty of the army (and hence, keep yourself in power). A private business might choose to pay its people daily, but the government is constrained by its taxation infrastructure and bureaucratic delays to collecting much less frequently than that. If you're a group of guys with guns, and a wealthy private business owner can pay you $X today or the government can pay you $X which will be worth 1/10th as much at the end of the month, who do you work for? (Well, in practice the answer is likely to be "both of them", which is equally problematic for the government.)

So the government makes up the short-term shortfall by printing money and increasing the denomination of bills. Now they've increased M, and the cycle continues.

> Servicing the debt usually just means paying interest on it and rolling it over. That's not going to cause hyperinflation.

I agree it's hard to imagine getting to that point but, at least for me, that could simply be a failure of the imagination.

If debt growth continually outpaces GDP growth until the interest (or, particularly, until the 20% of the interest that must be paid to other nations) is a significant fraction of the GDP, and then a recession hits, might that do it?

Why would markets/buyers of treasuries care? It's been shown multiple times over the last few years that there will be a bunch of political shenanigans, but ultimately the ceiling will be raised again and that T-bills will continue to be highly desirable and safe despite all the fuss.

I don't want this to happen. But I think it will.

Debt is not a good thing, especially when it is ignored.

You can easily find many articles explaining why the national debt is very different from how we think about personal debt (e.g. http://money.com/money/4293910/national-debt-investors/).

And then even in the personal finance space, "debt is not a good thing" is just an incorrect statement, because it always makes perfect sense to borrow money at a lower interest rate than you can make via investments.

> You can easily find many articles explaining why the national debt is very different from how we think about personal debt (e.g. http://money.com/money/4293910/national-debt-investors/).

Article: "Things aren’t at a boiling point — yet."

Well I am now definitely comforted...

Chris Hayes did a podcast that helps explain the difference. Basically, the government is the sole source of money. If it were to balance its books it would mean the entire economy was zero sum. The government being in debt means its leaving value out in the economy. There’s a surplus of money on the not-government balance sheet.

Source: https://www.nbcnews.com/think/opinion/debunking-deficit-hyst...

Glancing through it I can't find any mention of what's supposed to happen when the country ends up with so much debt that most of the government's income ends up going toward interest... leaving little/no funds for all its other expenses. Or for the rest of the interest it'll accumulate the following year. Is the idea that you just print money and the problem goes away ("what could possibly go wrong?")?

The most likely outcome is that interest rates will asymptotically approach zero as debt increases and the theoretical claim that the natural rate of interest is zero will be proven. And obviously a zero interest treasury security is essentially the exact same thing as a normal currency note.

Keep in mind that a 0% federal funds rate doesn't mean commercial banks won't charge interest. Which, by the way, leads to another important point. Something like 90% of the money in use isn't even created by the government, rather it's created from thin air by licensed banks. This is why a banking license is a huge deal. It is, subject to some restrictions, an actual license to create new money.

Sorry, I don't follow. Zero interest? Are we talking about the same interest? We're paying hundreds of billions of dollars to China in interest. In what world is China going to let the US keep its money and lower the interest it receives in return to zero?

In the world where China wants to keep its own currency at a low value in order to continue the export-driven economic policy.

Look, obviously China can sell its US treasuries in exchange for "cash" (electronic balances in a current account). If it did that, the US would only benefit.

If China then exchanged this USD "cash" into another currency, the worst that would happen is for the USD to reduce in value in the foreign exchange markets, which would boost US exports and therefore boost the US economy.

Yeah, US consumers would have somewhat less purchasing power for some time, but that only balances out the fact that US consumers currently have somewhat more purchasing power than they would "naturally" have.

That’s the most straightforward explanation ive seen yet!

Don’t think China has _let_ power over the United States. I’d imagine some agreement would be met that would be in the best interest of both nations. At least I would hope for that...

Another good treatment with graphs that make it virtually crystal clear: https://americanaffairsjournal.org/2019/02/does-america-need...

"it always makes perfect sense to borrow money at a lower interest rate than you can make via investments."

Only if you actually invest and the returns are guaranteed.

Right, I think that's where the idea of "debt is bad" comes from, only thinking about money as "i can only use money to pay for expenses" as opposed to "i can use this to make more money", and then of course you always have to consider inflation as well.

Sovereign currency issuers don't have debt the way non-sovereign entities do (or sovereign entities that use a currency they don't issue). The federal government can always coin money to pay its debts if it needs to. So the likely outcome of the democratic House trying to force a default is Trump ordering Mnuchin to mint a $1 trillion platinum coin with Trump's profile on the obverse and depositing it at the Fed. Which will then be enjoined by a 9th circuit district judge because Trump did it, even though back in the Obama years the exact same thing was acknowledged as entirely legal.

Remember the funds are already legally appropriated! So minting a coin isn't the executive violating separation of powers. It's just an accounting gimmick. The resulting funds can still only be spent as authorized by congress.

Another factor is that the Fed might just let Treasury overdraw it's account. Even normal commercial banks can allow demand account holders to spend into the negative as a courtesy. I imagine extremely wealthy private individuals with a private banking relationship can overdraw into the millions. The Treasury is obviously an extremely wealthy "person," not just because it can create money (by coining, I'm not sure if Treasury can still print US Notes, but I do know it doesn't), but also because of its taxing power, vast real estate holdings, and other assets.

Until the day that it doesn't.

From the article: "Interest rates, already one of the fastest rising costs in the federal budget, will rise as the political crisis builds, because foreign borrowers will demand an additional risk premium."

Wrong. Interest rates will rise if the Federal Reserve raises interest rates. They will not if it does not. The Fed controls 100% of overnight rates and virtually all of the rest of the yield curve[1]: "as we went out on the curve the correlations remained very tight (FFR at 100%, 3 month at 97%, 1 year at 96%, 5 year at 91%, 10 year at 86%, 30 year at 87%). Even at the longest duration there is an 87% correlation between the movements of the Fed Funds Rate and the 30 year bond. In other words, the bond market is the Fed’s whipping boy. Not the other way around."

What the Fed does not control is the US dollar's foreign exchange rate. So it's entirely possible that debt ceiling worries will cause a weaker dollar. Paradoxically though, they might cause a stronger dollar since the government not issuing debt actually constrains the dollar supply. Sovereign finances are deeply weird, and global reserve currencies are too.

[1] https://www.pragcap.com/i-want-to-come-back-as-the-federal-r...

My theory is the fed isn't all powerful with interest rates. They have target rates they wish to achieve and one way is to buy and sell treasuries on the open market. Treasury prices are still up to the results of an auction process. But there is usually a secondary market you can buy from from treasuries that have already been awarded to someone.

The debt itself is not fearful. Being unable to sell treasuries at low costs will be a big change. The fear is that todays political climate could indeed be too messed up to act in time so that congress has the authority to spend. Missed payments are going to be a problem if it happens.

But I'm not a finance expert.

Your theory proved correct in the 1970s, things got so messed up "everything" rose, both unemployment and inflation driving a stake into the heart of the Phillips Curve, and what people demanded to buy private or Federal debt. The latter got so bad "Carter bonds" were created, denominated in West German Marks or Swiss Francs: https://en.wikipedia.org/wiki/Carter_bonds

Very interesting. I did not know non dollar deominated us treasury debt exited.

Am I wrong or do USA have an extreme discrepancy between government spending and tax revenue? Isn't it strange that the American Government is spending 38% of gdp, but only collecting 27% of gdp in taxes?

Compare Japan with USA

Japan tax pressure: 35.9%.

USA tax pressure: 27.1%

Japan gov spending: 38.9%

USA gov spending: 38.0%

As you can see to a naive person it might look like Japan has a much bigger government than USA, but they are actually very similar.

https://tradingeconomics.com/united-states/government-spendi... https://tradingeconomics.com/japan/government-spending-to-gd...

https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven...

https://ourworldindata.org/grapher/historical-gov-spending-g...

It's worth noting that the debt ceiling is not a brake on spending, which continues apace. It is a brake on paying back debt. The analogy to personal finance that debt hawks love would be to rack up a bunch of debt on your credit card, and then balk when the bill comes due.

It's actually even more ridiculous than that. All the expenditures debt issuance "funds" have already been appropriated by congress, which is to say the agreement to pay has already been made. The debt ceiling is just an accounting gimmick based on the legal theory that the US Treasury's demand account at the Federal Reserve can't overdraw. Treasury could very much just write the checks (and probably is legally obligated to!) and then it would be up to the Fed to clear or bounce them. I don't see any Federal Reserve Chairman personally signing off on forcing a government default.

It's interesting that there's no legal consequences, for the politicians, to raise the debt ceiling.

Is this the same in other countries as well?

Are there other countries with a US-like debt ceiling? Australia had one between 2007 and 2013 (https://en.wikipedia.org/wiki/Australian_government_debt#Deb...) and the EU stability and growth pact (https://en.m.wikipedia.org/wiki/Stability_and_Growth_Pact) limits debt to 60% of GDP, but its measures are a lot drastic than what the US does, and its limit was softened in 2005 (https://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Refo...)

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