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Comment by ren_engineer | Hacker News Reader

basically, I'm wondering if we'd go into a recession immediately if the government was forced to cut spending to sustainable levels. The debt is finally hitting a point of no return where we have to cut, next year we'll spend more on debt interest payments than our military

the main argument that the economy is doing well is that "the labor market is strong" and unemployment is low, but how many jobs are tied to government deficit spending via contracts or direct employment? If that spending is cut back, I'd imagine the jobs numbers will quickly start to decline

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The government has been reducing spending since all the COVID support in 2020 and 2021. At its peak, government spending was over $7 trillion, which was over 30% of GDP in 2020. It appears to be trending back to the pre-COVID ratio: ~20% of the GDP is government spending. https://fiscaldata.treasury.gov/americas-finance-guide/feder...

But at the same time has the largest non-COVID deficit ever. `22 and `23 defectors are trending higher, not lower.[0]

0 - https://www.reuters.com/world/us/us-budget-deficit-jumps-23-...

> sustainable levels

That's really the key thing. What level is sustainable? I've come around to the idea that the main danger of deficit spending is inflation (because of the idea that government debt is private sector wealth).

The big levers the government have access to are spending and taxes. The first adds wealth, the second subtracts. In this way, government debt is really nothing like household debt that you and I have.

Inflation is their primary lever actually. Why bother paying down the debt when you can simply make it worth less? It's fiscally irresponsible, but that's how it works.

You seem to agree with Keynes. Assuming you’re in the lower 99%, are you wealthier in proportion to increases costs over the past quarter?

I personally don’t buy it. When other country’s start divesting from US treasury ties, the party will be over. Already prices are rising faster than income. What did Germany, Zimbabwe, and Argentina, Venezuela, etc. do wrong, that the US is doing right?

A better question is to ask what is Japan doing right since they are a lot farther down this path. Their debt to GDP ratio is something like 230% which is almost 2x the US ratio.

The answer is that Japan isn't doing it right. People struggle, taxes are high and pay is generally low (but for tourists, Japan is incredibly affordable). They still do OK, but we shouldn't see Japan as a model of how to do things.

Do you think if the government had less debt, all of those problems would be less severe?

That is impossible to say in isolation of just that one factor. My only claim is that Japan shouldn't be considered to be doing well.

The USD is in quite a unique place that makes this formula a lot more complex. For example, a mixture of being the global reserve currency, as well as the largest consumer market in the world helps the US to effectively 'export its inflation.' A quick search [1] on that term can turn up a bunch more hits than this brief(?) post.

Think about Carland, a country that makes lots of nice cars, and largely sells them to the US. Imagine the US decides to print a bunch of money, weakening our currency relative to Carland's. Carland's cars now cost more for Americans to buy. This might sound nice at first (for a Carlandian car peddler), but in reality what's going to happen is less cars are going to be sold, and your cars are likely to become less competitive than those from other countries. So the Carland government has a major incentive to try to weaken their own currency, and start doing exactly that. So other countries effectively end up absorbing much of our inflation, helping to greatly minimize the impact of any given batch of money-printing.

So if the USD hits a point where we're no longer able to effectively export our inflation, the result's not going to just be inflation. That's a SHTF moment, because it means we'll have reached a point where we're inflating so much that other countries simply can't afford to absorb it without or imperiling their own economies, or have become okay with not exporting much to the US. Given how extremely dependent we are on imports, this is going to be a catastrophe.

Beyond this there are lots of self-feedback effects to consider, especially with borrowing, but this post is already long enough!

[1] - https://search.brave.com/search?q=exporting+inflation&source...

Imagine how much it will "grow" when we get involved in 2+ simultaneous wars.

It will likely "grow" into 1 large war.

I think they were referring to the two wars we spent decades in that increased spending. OIF and OEF.

The money is coming from somewhere. If it wasn't lent to the government, it would be spent in other ways. So the only reason that it should cause a recession is if the government is spending it in better ways to grow the economy than the private sector would/could (e.g. because the best investments are infrastructure related).

But if it's actually providing a boost to economic growth, it also means the debt isn't actually unsustainable. If you boost economic growth this year by 0.1%, and afterward it returns to previous growth rates, then the economy will stay 0.1% larger than it otherwise would have been perpetually. If your interest rates are comparable to the base line economic growth (true now, last decade they have been lower), and you take a twenty-year view, then taking on 5% of GDP in debt to generate a one off 1% growth boost to the economy is a no-brainer. The real issue is to understand when the government (vis a vis the private sector) actually can spend money to generate genuine extra growth, and when it cannot (e.g. if it only shifts growth that would happen anyway forward you would expect growth to dip after the initial boost, but that would be true whether the deficit spending stops or not).

The argument against debt is often not based in economic sense or sound science (remember the debacle when a widely cited study on the problems with high debt turned out to be based on an Excel mistake?). In my view, it's based on an aversion to the government having too much spending power. After all, a version of the argument, above was used by conservatives to sell tax cuts that were supposed to pay for themselves. They didn't because the tax cuts did not actually generate growth, they merely redistributed wealth to the top. For deficit spending, the evidence that it can boost economic growth is much more robust.

The real debt crisis will hit once countries start to seriously shrink...

>it would be spent in other ways

Or it would've been placed in the reverse REPO facility at delicious interest rates paid straight from the printing press. A lot of COVID spending was sanitized this way, without it inflation would've been much higher. And this money has started to get back into the economy.

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