The US fiscal mess: Some unpleasant fiscal simulations

There’s no political will to raise taxes and cut government spending. One or the other may happen but not both. Both are required to get us out of this mess. We don’t have politicians that think long term.

As a consequence, the Fed will be forced to lower interest rates as low as possible again so the government can escape crushing interest payments and let inflation inflate away government debt.

Expect long term inflation, asset prices, and commodity prices that keeps rising as a consequence.

People forget that the economy is not about money, it's about stuff - the goods and services that add (economic) value to our lives: food, shelter, video games, medical treatments, shoes, etc.

The problem isn't the deficit - it's the spending. When the government spends money, it takes people away from whatever other economic activity that person would be doing, and consumes their labor in service of the government instead. This reduces economic productivity, and we all end up with less stuff as a result.

The key is to focus on productivity in terms of stuff (not money) - everything else takes care of itself.

This is important because focusing on money and the deficit often inspire solutions that attempt to solve those problems, but at the cost of hurting productivity. Higher taxes, for example. Raising taxes may (arguably) raise revenue and reduce the deficit - but may well also reduce productivity. That would be bad.

It's an interesting article, but the number of typos makes me wonder how rigorous it is.

It also takes as an unstated given that we need or want to stabilize deficit/GDP or debt/GDP ratios.

The US dollar is still a global reserve currency. The US situation might therefore be "special" or "privileged" compared to other countries that have non-reserve "local" currencies.

The other question I have, is "does debt/GDP & deficit/GDP matter in absolute terms, or only in relative terms?". One could imagine a world where most governments have similar debt problems, and their currencies have similar inflation problems. For someone holding currency, there would be little reason to pick another currency in this scenario. One would instead predict a rush to place money in assets, causing asset inflation. That sounds like our present calamity, perhaps from different or more varied causes.

> The US interest bill is rising. In 2024, it is projected to exceed the entire military budget.

This is the one that is mind blowing. The military is fucking gigantically huge. And every single years a militray budget worth of stuff simple gets burned for 'nothing'.

The problem in the US is that most of the money is already commited. The future money is already promissed. And the rest is mostly military and debt service. And what is left over isnt enough to cut to be effective.

I really dont see a solution.

I'm happy that in my country we have strict limits in place and debt/gpd is only 40%. Not have the huge debt servicing ever year seems usuful to stabilze your budget long term.

The article is a bit doom and gloom. The debt to GDP levels are fairly middling against other developing countries. Also historically what usually happens to government debt is that it isn't really paid back but sits there and is reduced in value over time by inflation. That will probably happen here.

(Genuine questions here!) Is paying less interest an option? Either "refinancing" the debt at lower interest rates, or simply declaring that existing bonds will be paid out at a lower rate? People will presumably still want to hold US Treasuries because of their other properties.

Also Japan has a debt to GDP much, much greater than the US, and still seems to function fine as a country, so how do they do things differently?

The debt doesn't matter too much... what matters the most for any country is if they have a lot of educated and talented people living there or not, the companies they work for, and a stable society and political environment. This is not going to change due to federal accounting tricks.

It would be better to live in the U.S. with a 100x debt/gdp than live in Haiti, Niger, or South Sudan with a 0.1x debt/gdp.

I'm not going to comment on the article because most electively-undertaken fiscal projections are colored with the theories harbored by the authors.

However, I'd like to point out that the budget hawks of yesteryear (Reagan, Simpson, McCain) were at least logically consistent in that they were pro-immigration.

Immigration's positive impact on US fiscal policy is so large that not even right-wing think-tanks can refute it. [1] It raises the fraction of the population currently in the labor force. As a separate, compounded effect, the average immigrant contributes more to the social services pot than they draw out. The bonus to Social Security is even larger because of the undocumented population, which pays payroll taxes but is ineligible for retirement benefits. This effectively foots the bill for 2-3 million American retirees. [2]

So when today's populists peddle nativism while posing as budget hawks, it really fits in nicely with the rest of their bill of goods.

[1] https://www.cato.org/blog/fiscal-impact-immigration-united-s...

[2] https://www.americanprogress.org/article/improving-lives-str...

As the joke goes.

If I owe you 100 grand and I can't pay, I am in trouble.

If I owe you 100 trillion and I can't pay, you are in trouble.

It is weird to me to have so many people complain about inflation and have so many people say that our deficits won't cause inflation. We have been hiding inflation for so long and it finally hit us. Unfortunately I haven't met a politician yet that will actually try to balance the budget. It is a bunch of spend more and cut taxes that win elections.

How does this compare to the fiscal situation at the time of WWI or WWII? And how does it compare relative to other factors like other countries' finances?

The CEPR is an EU think tank supported by the French Government [0]

France and Germany have been lobbying against US stimulus packages like the IRA and IIJA, and economic protectionism that has become mainstream politically [1]. It is becoming a trade war [2]

Western European allies can tell the US what to do when they start carrying their weight like Poland, Romania, Czechia, etc.

[0] - https://cepr.org/about

[1] - https://www.politico.eu/article/macron-heads-to-washington-o...

[2] - https://www.institutmontaigne.org/en/expressions/real-reason...

Important to consider that all the debt was created during a time of relative peace. Now, the U.S. is potentially facing three simultaneous wars having already increased the debt to these levels.

There are changes in international settlement that bypass the dollar. China and Russia and others have been advancing ways around needing to use the U.S. which is already having consequences as some of this would have found its way to funding the rising U.S. deficit.

Most likely through buying Government debt and there is a chance we will know when the debt party is over if there is ever a Treasury issuance that cant find a buyer.

Given that part of the problem is the system where there is always a buyer of last resort and so much of the debt is money we owe ourselves. Which reduces but does not eliminate the impact of the move away from the dollar.

It is clearly unsustainable and certain measures like the reverse repo market show a sort of short term liquidity and it is interesting to compare it to future issuance of debt.

The resulting effect then would have to be increased inflation until spending reaches and equilibrium again. Though with all of the potential threats around the world, anything can happen.

It just isn't sustainable and there seems to be a collective delusion that it is.

The sign in the article is out of date, it claims the US debt is ~$31 trillion. That is off by about $4 trillion; which I think dates the photo to sometime last year or the year before.

Who is this debt owed to and what will they do with it should it be repaid?

I think this is missing out the most-obvious corrective scenario: super-high inflation.

As long as US imperialism exists, the US dollar will be reserve currency and the US will be able to print away problems. This is the exorbitant privilege the US has which is effectively extracting tribute from all international transactions in dollar.