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No one knows how much the government can borrow

noahpinion.substack.com

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Re: No one knows how much the government can borrow

#131
post #107

The answer is you can borrow unlimited debt if you pin interest rates at 0% (though eventually you will lose control at the back end of the yield curve without heavy govt intervention). What happens to your currency in that process is debasement/hyperinflation.

The term hyperinflation needs to fall out of the lexicon. In every casual economic discussion it's the favorite apocalypse goto word for people, and every one seems to think it's right around the corner. It's not going to happen.

Why not? Is there something that makes the US immune?

Also, people fixate on the "hyper" part and assume the US is going to go full Zimbabwe/Venezuela where an egg costs a trillion dollars, but even sustained non-hyper inflation of 10% or 20%/year would wreak havoc on most people's retirement funds or mortgages.

Re: No one knows how much the government can borrow

#132

Earlier quoted context omitted.

Japan is in a category of its own. They have a declining population which followed a massive asset bubble that popped 30 years ago. https://fred.stlouisfed.org/series/POPTOTJPA647NWDB

> Dean Baker goes after people who claim that Japan has suffered terribly from its debt burden, arguing that Japan has actually done pretty well. But he's wrong: Japan has done better than he says > Dean looks at GDP per capita. But Japan's aging population means that you really want to look at GDP per working-age adult. And by that measure Japan's growth has been essentially the same as America's […] > The truth is…

You can't just ignore all the people who aren't working though? One of Japan's specific problems (which will also hit much of the West in a decade or two) is that society is aging fast and the ratio of retirees to working people is increasingly unsustainable.

Re: No one knows how much the government can borrow

#133

The answer is you can borrow unlimited debt if you pin interest rates at 0% (though eventually you will lose control at the back end of the yield curve without heavy govt intervention). What happens to your currency in that process is debasement/hyperinflation.

> What happens to your currency in that process is debasement/hyperinflation. Japan may disagree with that assessment: * Interest rate: https://fred.stlouisfed.org/series/INTDSRJPM193N * Inflation: https://fred.stlouisfed.org/series/FPCPITOTLZGJPN * YEN-USD: https://fred.stlouisfed.org/series/EXJPUS

Turkeys think they have a great life right up until Thanksgiving.

While I’ll readily concede that Japan has surprised everyone, at some point in time the sheer magnitude will overcome the lenders’ belief. Their ability to repay, and then it all goes downhill very fast.

That’s the thing - hyperinflation happens fast. You usually don’t see inflation, high inflation, higher inflation, and then hyperinflation. Instead you see slow deterioration and then a huge jump in a short period of time. It’s like falling off a cliff in its suddenness.

Re: No one knows how much the government can borrow

#134

Earlier quoted context omitted.

It's not really an economic question, it's one of politics, intimidation, and a global empire. The "magic money tree" is backed by the full force of the United States. Heads of state who have suggested alternatives found themselves confronted with a sweeping range of responses, starting with bribes, then coercion, sanctions, and if those fail, hiding in a hole from US forces. There's nothing magic, nor mysterious abo…

Does MMT work if you're not the reserve currency? (Honest question; I don't know enough about the theory to say.) But it is really an economic question. What will be the results if you run your economy this way? What will be the results if you do so as the reserve currency, and what will be the results if you do so when you're not?

MMT works so long as you've got the ability to conjure your own money. (Eg, not on the Euro, or a currency pegged to another currency.)

The idea is that you create money to pay for things, and then pull back excess money through taxes. (As opposed to pulling in money through taxes, using it to pay for things, and whining that you don't have enough.) So it 'works' as long as you have your own independent national currency.

Another mind flip: the scarce resource isn't money - it can always be generated - but labor. Inflation starts when there's a labor shortage, because up to that point you can just employ more people to meet demands.

Re: No one knows how much the government can borrow

#135

The answer is you can borrow unlimited debt if you pin interest rates at 0% (though eventually you will lose control at the back end of the yield curve without heavy govt intervention). What happens to your currency in that process is debasement/hyperinflation.

Small tangent: I tend to borrow all the money that is offered to me at 0% effective rate, e.g., when buying a new mobile phone. I would even go as far as to borrow all money that is offered to me at sub-inflation rates. Is this rational?

You just need to be careful because usually these offers have fine print along the lines "if you don't pay this back fast enough, you will have to pay very high interest even on the debt you already paid off."

Re: No one knows how much the government can borrow

#136

Earlier quoted context omitted.

Just because many people haven’t seen wage growth, doesn’t mean money isn’t sloshing around out there. Remember 20% of Americans own ~80% of all the wealth in the US. So if your looking for sloshing money you should look at what they’re doing, not what “most” people are doing. I think it’s fair to say that those a big chunk of those 20% probably have more money than they know what to do with, which probably means mon…

20% is 1 of 5, hardly easy to miss. A lot of that money goes toward expenses in HCOL areas, where more people live, and the salaries are higher. A lot goes into consumer goods. People buy stuff, a lot of it. A lot of the rest is in the stock market in retirement accounts because nobody has pensions anymore. Americans don’t save a lot of money, and are not particularly fiscally responsible, that money is not hiding in…

Personally, my issue with the term "sloshing" is that it implies the money is floating around in liquid form ready to tick up inflation. It's not.

There are a lot of places where this money has gone that are illiquid though. One would be American property; for most households a good chunk of their wealth is their house. In high-COL, high-property areas the main thing preventing a fall in house price is the lack of supply.

Another part of it is China and other countries with large amounts of USD. China has tight capital controls though so none of that money is about to leave suddenly any time soon. but if a big chunk left at once it would probably make the 1998 Asian capital flight look like child's play. Some countries like Saudi Arabia are trying to figure out how to spend it; Vision Fund literally created (and destroyed) very big companies in very short order. When Japan had this problem the hangover lasted for a decade, and depending on your view may even be continuing to this day.

Of course, the market can stay irrational longer than you can stay solvent, so these things are mostly theoretical until they're not. But no use holding your breath trying to wait for it.

Re: No one knows how much the government can borrow

#137

Earlier quoted context omitted.

My time in finance has led me to believe that traders and investors are far more prone to groupthink than they’re willing to admit to. “Hedge fund manager predicted inflation after QE and was wrong” is very low on my list of things that surprise me.

Yeah, they have an incentive to appear overconfident since their job is also largely a sales role, in order to prevent redemptions and encourage new fund inflows. They are still the number one domain experts insofar as Central Bank policy goes, as that's one of their primary preoccupations. Perhaps aside from economists that actually work at the Fed.

They’re not the number one domain experts though. As you said, those who work at the Fed are probably number one. I’d put academic economists at number two. That leaves the relevant traders/hedge fund managers in third at best.

Fundamentally, trading an instrument doesn’t necessarily make you an expert in all aspects of it, only in those aspects related to making a buck on it. Exactly how much a trader ends up knowing seems to vary. While a bond trader might understand how bonds work very well, chances are that a grain trader would make a pretty bad farmer.

It seems in passing that fixed income traders have a moderate level of expertise on how government debt works, with their long, loud, and so far wrong predictions about catastrophic inflation undermining any claim they have towards total expertise.

Re: No one knows how much the government can borrow

#138
post #125

Earlier quoted context omitted.

20% is 1 of 5, hardly easy to miss. A lot of that money goes toward expenses in HCOL areas, where more people live, and the salaries are higher. A lot goes into consumer goods. People buy stuff, a lot of it. A lot of the rest is in the stock market in retirement accounts because nobody has pensions anymore. Americans don’t save a lot of money, and are not particularly fiscally responsible, that money is not hiding in…

> Now start talking the top 1-2% and the story changes dramatically. Probably the top 5-6%. The numbers are lower but the behavior is similar. You’d be surprised how soon you hit the “More money than I know what to do with” line. Make 150 to 200k/year (not uncommon on HN) and what are you gonna do, buy a new car every year? Rent is paid, food is paid, clothes are good, 1 or 2 vacations per year, go out to eat wheneve…

My ex...liked to spend money. We made 300k combined in 2019 in a MCOL area, and I still have no idea where it all went. Mortgage, nice cars, eating out, a couple vacations - all gone! I’ve heard of people making 7 figures and can barely afford their lifestyle. Rule of thumb, people spend what they make. Some spend on saving/investing. I think that’s what sets apart the top percentage with a few exceptions, they make money work for them, not the other way around.

Re: No one knows how much the government can borrow

#139
This really is one of the most interesting and consequential economic questions of our time. And I do imagine we will get an answer, because there is no political will to cut spending anymore.

The reason that all this stimulus hasn't affected measured inflation all that much is because the mechanism of monetary policy tends to be top-heavy, creating low interest rates which obviously benefits the rich more than the poor (people with high credit who tend to borrow larger sums more frequently). The rich channel this wealth into assets like real estate and equities, which are underrepresented in the CPI, in my opinion. There should be more of a "Volume Weighted" approach to balancing where large sums of the global economic market cap are sitting.

And since the rich can apparently just hold wealth in index funds indefinitely and cash out what they need for expenses (don't worry, if a pandemic freezes the economy, the Fed will rescue your position and create a new bull market!), few of those dollars creep into the economy. The "buy, hold, and never sell the entire market" philosophy creates economic distortion that enables this type of policy, and is incentivized by lower long term capital gains tax rates.

So by using this regressive, but fast acting, method of money printing, we can stave off hyperinflation and prolonged bear markets at the expense of increased income inequality. A more progressive, but slower acting way to finance government spending is to print a universal stimulus check, tax it, and spend the tax. We do both, but lean heavier toward the open market operations approach.

The hidden variable, not mentioned in this post: social security. Social security, which is due to become insolvent sometime in the next two decades, will have consequences like the progressive stimulus checks, but on a much greater scale, if the Fed starts printing money to finance it. This is where the "everything bubble" will convert into plain old inflation, when millions of everyday people are getting and spending cash that was printed out of thin air, assuming there isn't some sort of reckoning before that.

Re: No one knows how much the government can borrow

#140

I can't help feeling that the question is ill-posed. It's not "how much", but "why" that matters. Think about it: Would you borrow $10,000 to a friend who opens a dentist with a solid business plan? Probably yes. Would you borrow $1000 to a friend to cover an existing debt? Probably not, or, if you are very generous, you would gift them the money. If a government can demonstrate that it borrows money to invest in the…

This. Economists may not studied hyper inflations much, they've spent a lot of time looking at inflation, the one economic variable public policy designed by mainstream economists is very good at predicting and influencing. They know it's the result of the amounts people are willing to spend on stuff (including labour) rising faster than the amount of stuff available. They know that government spending more money int…

Recently the Fed hasn't been good at getting inflation to 2% (their published target) and economists haven't been good at predicting whether the Fed will succeed, or modeling why the Fed has failed.

Noah (article) doesn't emphasize this but he does refer to it. We don't really understand ordinary inflation much less hyper-inflation. Even the cause of the famous period of inflation in the 1970s is still very much debated.

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