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Politically impossible solutions are economically inevitable. The US population pyramid is doing fairly well by first-world standards but it's still getting older and older. The US is also addicted to spending, racking up enormous debt. COVID is over. The US isn't even in a recession, officially. And yet debt keeps on going up at global pandemic rates.
https://tradingeconomics.com/united-states/government-debt
There's a $2 Trillion deficit planned for this year. Again, the US economy is officially doing well. What does the US economy doing badly look like?
Unless there are radical changes, eventually the US economy is going to collapse under the weight of this enormous and growing debt, now at 120% of GDP. Yes, Japan is over 200% debt to GDP but their interest rates are kept extremely low to keep this manageable, plus they have large current account surpluses to prop it all up. The Japanese economy is not an example to emulate. The US doesn't have the luxury of very low interest rates or current account surpluses, only a diminishing position as reserve currency. People aren't going to trade real goods and services for bits of paper forever, no matter how classy and prestigious those bits of paper might be. High debt, high inflation and high interest rates spells out economic Armageddon, it will make stagflation look like a joke. Imagine the Greek financial crisis but if there's no EU or IMF bailout coming.
What's the premise that a current account surplus allows higher government deficits? It should be the other way around: a current account surplus is the only way you can get away with running a government surplus. Otherwise, if the foreign sector is saving in your currency, and the domestic private sector always wants to net save, then the government has to run even larger deficits because it's all zero sum.
If the government is unwilling to run those deficits, then the domestic private sector would be hammered and run down savings / run up private debt like in the late clinton years until 2008 finally blew up: https://fred.stlouisfed.org/graph/?g=k16a
Well, people also said that when a million dollar debt was a large amount, and then when a billion dollar debt sounded like a lot, and then again when a trillion sounded like a lot. Historically it does look like this can go on perpetually unless the economy stops working for people pragmatically, fear of large numbers or not.
It strengthens the value of the currency, so states can print more money to finance their deficits. If your foreign assets are growing, then you have more room to borrow and print, compared to if your foreign assets are shrinking.
From wikipedia:
Raising interest rates is obviously a threat to government deficits!
The US is not in much danger currently since it has a lot of foreign assets and a valuable currency, plus people are buying US bonds which used to have a fairly low interest rate, so outflows were/are fairly low. Nevertheless current account deficits are a threat to the long-term stability of the $US. Someone has to buy all those dollars and it would be helpful if there were more exports for them to buy with those dollars. Furthermore, fiscal prudence never goes out of fashion, that should be a key lesson of 2008.
Hmm what someone wrote there sounds like some kind of narrative argument based around fixed exchange rates, but not very relevant in the world of floating currencies. Like when Soros 'Broke the Bank of England', he was specifically targeting their policy peg, and eventually forced them to abandon it and let it float.
As for net-exporting in order to have a stronger currency, that's kind of a self-correcting system with floating exchanges. Countries that want to keep a current account surplus (in order to target export-led demand growth) have to continually buy up foreign reserves and leave them untouched in bank accounts, in order to devalue their own currency to keep their exports competitive, like Japan and then China have done. And the countries on the receiving end like the US have foreign countries intentionally 'saving' in our currency like this, basically benefit for free (as long as we don't succumb to a fear of big numbers from the required government deficit, as the previous FRED graph showed in red, in order for green & blue to both be positive).
But I would say it's still unclear just how exchange rates are at all enabling or making space for borrowing or printing domestically. There just isn't a mechanism there. For the interest rate, the government raising their own interest rate can increase the deficit, but monetary policy can't exactly discipline fiscal policy in any way. The government has the power to levy taxes, has its own currency, and has its own central bank, so I'd think the debt that's gone up for centuries should be able to continue at pace without any economic armageddon.
If you print money, then each dollar is going to be less valuable. Increasing the supply of something reduces its price. Say the US printed $50 trillion tomorrow. The value of the USD would fall compared to foreign currencies because each dollar would be worth less (and because the rest of the world would think the Fed was off their heads). Inflation applies to buying things from other countries too. Or if you're currency is plunging, you don't have much room to lower interest rates.
Only so long as the USD is perceived to be valuable. What happens when they stop buying US bonds because they know that the only thing backing US bonds is more US bonds to be printed in future years? Interest rates on US bonds will have to rise, borrowing will be more constrained. Massive deficit spending sucks capital out of the rest of the economy, it's not a good thing.
Look at how much govt revenue the US is spending just on paying interest. It's verging towards the territory of the dodgy countries like Angola, rather than the safe countries like Australia or Norway: https://tradingeconomics.com/country-list/interest-payments-percent-of-revenue-wb-data.html
Oh inflation, yeah that will continue and definitely feeds into exchange rates when different from other currencies. In the story about how people thought $100 million was too much government debt in the early 1800s, then $2-3 billion sounded crazy after the civil war, then $20 billion, $1 trillion, $30 trillion, etc., that's obviously also underscoring that over time inflation changes the value of a single dollar. All the prices just have to adjust, which can be annoying and unpleasant but not apocalyptic, especially if the inflation is fairly low/constant over short time frames.
Although more accurately the identity is MV≡PQ where all parts can be independent, bringing in quantity of goods sold and especially velocity, which both can't simply be assumed to be fixed. So if the $50 trillion is issued (and counted in whatever monetary aggregate you want to use) but it just sits in an account, then you can say that M went way up and V went way down, with the price level unaffected.
If the hypothetical is that the government actually pushes out $50 trillion in spending tomorrow, it would massively juice GDP and also a ton would come back in taxes, but yeah the price level would adjust well upward from that kind of shock (with some short-term chaos) and the exchange rate would move accordingly (or more). The question for importing though (and the economy in general) isn't what a single dollar can buy, but what all the dollars can buy. And as for americans themselves, some may wish to say 'this isn't worth the paper it's printed on anymore', but they still have to pay taxes every year payable only in USD, and pretty soon in this hypothetical, the median annual income tax bill might go from ~$15k to $100k+.
There just isn't evidence that inflation or national debt are disastrous powder kegs waiting to explode. On the other hand, every time the national debt was significantly reduced, it ended with our only depressions. Which makes sense, because the government debt is simultaneously the non-government net savings, and things get dicey when you drain the savings from the private sector and force up private debt:
That's the 'bond vigilantes' threat story, but it's just not a relevant factor in the real world of governments that issue their own currency and have their own central banks. Even with the self-imposed legal constraint that the Fed can't directly buy treasury bonds at auction or let the treasury's reserve account go negative/overdraft, they still effectively make sure that every single treasury auction goes off without a hitch at the policy rate (even 0% forever if they want). The NYFed manages primary dealer commercial banks who are tasked with this, in order to circumvent the law against 'direct' central bank funding.
Yeah I think it's crazy as well, although mainly because I find the argument compelling that they're currently wrong about whether low rates are inflationary / high rates are disinflationary, and that there's good evidence that it's the reverse (so all those years of 0% interest but they couldn't get inflation up to target 2%, and now years of inflation sparked by supply chain issues that stubbornly won't come down no matter how high they raise rates). Precisely because the government is a massive net payer of interest, so raising rates increases government spending, which we would expect to be expansionary not contractionary.
I'd agree with a policy of just setting the FFR at 0-1% and leaving it there, because it's just not a cleanly useful policy lever, and we shouldn't otherwise have any goal of the government subsidizing risk-free savings by choosing to pay interest.
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Also, isn't a very high proportion of Japanese debt domestic? Domestic debt still causes problems, through deadweight losses, but from a national perspective, it doesn't mean buying things today at the cost of selling your grandchildren's labour to foreigners.
It does mean redistributing wealth from younger to older generations, though.
True, but those older generations then die, and pass on that wealth to the next generation. The big problem is that generations are not people, so you end up with deadweight losses. For example, the younger person who inherits the national debt might be quite different from the person who would have had more wealth as a result of earning more in their working lives. As people's outcomes in life become more the product of what their parents did, this reduces their own incentives to work hard and smart in order to succeed.
I saw this recently in China, where "Lying Flat" culture (do the bare minimum to avoid getting fired from a job that provides you with an ok lifestyle) is becoming more common. From what people told me and from what I've read, it's because success is increasingly a product of whether your parents are well-connected in/with the Communist Party, rather than whether you are hard-working or innovative. So, after a period where upward mobility encourage a Herculean work culture in China, the younger generations are increasingly reverting to the work ethic of their peasant ancestors: do as little as you can while staying out of trouble, because no matter how hard you work, you will never become an aristocrat. Ironically, "Socialism with Chinese Characteristics" is becoming "Capitalism with Feudalist Characteristics."
Similarly, the decline in aristocratic privilege and the necessity of inheritance for wealth were driving forces behind the Industrial Revolution and the Great Enrichment. Unlike almost all of human history, people could rise to wealth and prestige through enterprise, saving, and hard-work, whereas the traditional routes had been (a) being good at splitting open people's heads in battle, (b) marrying up, or (c) being born into wealth.
National debt and intergenerational inequality encourage the same social sickness, by making people's inheritance of wealth more important relative to their own efforts.
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