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Thread: WSJ: Worry About Debt? Not So Fast, Some Economists Say

  1. #1

    WSJ: Worry About Debt? Not So Fast, Some Economists Say




    Worry About Debt? Not So Fast, Some Economists Say
    U.S. deficits may not matter so much after all—and it might not hurt to expand them for the right reasons

    https://www.wsj.com/articles/worry-a...d=hp_lead_pos3


    As the national debt swells, some economists are making a once-heretical argument: The U.S. needn’t be so worried about all of its red ink.

    The 2017 Republican tax cuts and this year’s Democratic spending proposals have reignited long-simmering worries that the debt is getting too big. Annual deficits are set to top $1 trillion starting in 2022 and the Congressional Budget Office projects debt will total 93% of gross domestic product by the end of the next decade.

    Yet borrowing costs are still historically low, despite a surge in deficits and debt in the years following the financial crisis. Debt as a share of GDP rose from 34% before the recession, to 78% at the end of 2018. Treasury yields, on the other hand, have fallen from over 4% before the recession to 2.7%.

    That suggests investors aren’t worried about holding large volumes of credit.

    In theory, high debt levels should cause interest rates to rise. That’s because investors will demand higher returns to compensate for the risk they take on when the government borrows at unsustainable levels or because they worry that so much debt could trigger inflation. The need to finance such high levels of debt also makes less money available for other investments.

    In practice, investors are happy to keep lending to the U.S. in good times and bad, regardless of how much it borrows. In 2009, for instance, when the Obama administration’s stimulus efforts sent federal deficits rising to almost 10% of GDP, the highest since World War II, the interest on 10-year Treasury securities remained below where it had been before the recession.

    Many Republicans warned the U.S. was pushing itself to the brink of a fiscal crisis and pressed Mr. Obama to rein in spending. Economists debated how much debt a nation could hold before it crimped growth. In one paper, Harvard University economics professor Carmen Reinhart and Kenneth Rogoff, a former chief economist at the International Monetary Fund, found that countries with debt loads greater than 90% of GDP tended to have slower growth rates.

    Now, some prominent economists say U.S. deficits don’t matter so much after all, and it might not hurt to expand them in return for beneficial programs such as an infrastructure project.

    “The levels of debt we have in the U.S. are not catastrophic,” said Olivier Blanchard, an economist at the Peterson Institute for International Economics. “We clearly can afford more debt if there is a good reason to do it. There’s no reason to panic.”

    Mr. Blanchard, also a former IMF chief economist, delivered a lecture at last month’s meeting of the American Economic Association where he called on economists and policymakers to reconsider their views on debt.

    The crux of Mr. Blanchard’s argument is that when the interest rate on government borrowing is below the growth rate of the economy, financing the debt should be sustainable.

    Interest rates will likely remain low in the coming years as the population ages. An aging population borrows and spends less and limits how much firms invest, holding down borrowing costs. That suggests the government will not be faced with an urgent need to shrink the debt.

    Mr. Blanchard stops short of arguing that the government should run up its debt indiscriminately. The need to finance higher government debt loads could soak up capital from investors that might otherwise be invested in promising private ventures.

    Mr. Rogoff himself is sympathetic. “The U.S. position is very strong at the moment,” he said. “There’s room.”

    Some left-wing economists go even further by arguing for a new way of thinking about fiscal policy, known as Modern Monetary Theory.

    MMT argues that fiscal policy makers are not constrained by their ability to find investors to buy bonds that finance deficits—because the U.S. government can, if necessary, print its own currency to finance deficits or repay bondholders—but by the economy’s ability to support all the additional spending and jobs without shortages and inflation cropping up.


    Rather than looking at whether a new policy will add to the deficit, lawmakers should instead consider whether new spending could lead to higher inflation or create dislocation in the economy, said economist Stephanie Kelton, a Stony Brook University professor and former chief economist for Democrats on the Senate Budget Committee.

    If the economy has the ability to absorb that spending without boosting price pressures, there’s no need for policy makers to “offset” that spending elsewhere, she said. If price pressures do crop up, policy makers can raise taxes or the Federal Reserve can raise interest rates.

    “All we’re saying, the MMT approach, is just to point out that there’s more space,” she said. “We could be richer as a nation if we weren’t so timid in the use of fiscal policy.”


    So far the runup in government debt has not led to steep price increases. Inflation has stayed at or below the Federal Reserve’s target for most of the past quarter century.

    Still, many other economists aren’t ready to embrace these ideas.

    Alan Auerbach, an economist at the University of California at Berkeley, says the MMT view “is just silly” and could lead to unwanted or unexpected inflation.

    Meantime, Greece and Italy are two recent examples of countries that appear to have hit thresholds where high debt loads lead to higher interest rates and economic pain. The U.S. may have such a threshold too, just not yet seen.

    Goldman Sachs Group Inc. economists found that countries with higher debt-to-GDP ratios heading into recessions have smaller fiscal responses, and subsequently worse growth outcomes, though countries that issue debt in their own currency—such as the U.S.—appear to be less affected.

    By continuing to run large deficits, says Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget, the U.S. is slowing wage growth by crowding out private investment, increasing the amount of the budget dedicated to financing the past and putting the country at a small but increased risk of a future fiscal crisis.

    Market interest rate signals can be misleading and dangerous. By blessing the U.S. with such low rates now, he says, financial markets just might be “giving us the rope with which to hang ourselves.”
    Last edited by EBounding; 02-18-2019 at 09:15 AM.



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  3. #2
    “All we’re saying, the MMT approach, is just to point out that there’s more space,” she said. “We could be richer as a nation if we weren’t so timid in the use of fiscal policy.”
    Lol. Dammit, Ricky. Quit being so timid with your spending!

    What a bunch of bovine excrement.
    "And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." - Bastiat

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  4. #3
    In theory, high debt levels should cause interest rates to rise. That’s because investors will demand higher returns to compensate for the risk they take on when the government borrows at unsustainable levels or because they worry that so much debt could trigger inflation.
    The question remains, why don't investors demand higher interest from the US government? It seems to me that they should. At some point they must. But at what point?

  5. #4
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  6. #5
    Quote Originally Posted by Superfluous Man View Post
    The question remains, why don't investors demand higher interest from the US government? It seems to me that they should. At some point they must. But at what point?
    Two things could cause it. One is a higher rate of inflation. Bond holders want to at least match the expected rate of inflation- higher inflation leads to higher interest rates. Inflation peaked at double digits in 1980 and so did Treasury rates.



    The second thing would be investors fearing the US might not pay the interest on their debts. Treasuries are considered a very secure investment with minimal risk of default so investors are willing to accept very low returns in exchange for that safety.
    Last edited by Zippyjuan; 02-18-2019 at 11:55 AM.

  7. #6
    Quote Originally Posted by Zippyjuan View Post
    Two things could cause it. One is a higher rate of inflation. Bond holders want to at least match the expected rate of inflation- higher inflation leads to higher interest rates. Inflation peaked at double digits in 1980 and so did Treasury rates.
    But investors should be concerned about expected future inflation, not just what the inflation rate has been comparing prices this year with last year.

    Quote Originally Posted by Zippyjuan View Post
    Treasuries are considered a very secure investment with minimal risk of default so investors are willing to accept very low returns in exchange for that safety.
    But why do investors continue to see Treasuries as low risk going on into the future? And how bad will the federal government's fiscal situation have to get before investors no longer consider treasuries low risk?

    What can't go on forever won't. At some point, the federal government is going to default in one way or another on some of its obligations, whether that be via inflation or other failures to fulfill promises. Once the expectations of investors are such that they start looking 30 years down the road and lack confidence that the federal government will still be able to pay all its obligations at that point without excessive inflation, Treasuries will need to offer higher interest rates to attract purchasers.

  8. #7
    I must say I am beginning to hear a lot of the same talking points I heard in 2007.

    Debt isn't bad, and the fundamentals of our economy are strong.

    We'll see, I guess.

  9. #8
    Quote Originally Posted by Superfluous Man View Post
    But investors should be concerned about expected future inflation, not just what the inflation rate has been comparing prices this year with last year.



    But why do investors continue to see Treasuries as low risk going on into the future? And how bad will the federal government's fiscal situation have to get before investors no longer consider treasuries low risk?
    3 words: World's Reserve Currency

    If anything threatens that, the whole house of cards comes down. Which is why we spend crazy amounts on military and why certain nations are deemed "enemies".
    "And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." - Bastiat

    "It is difficult to free fools from the chains they revere." - Voltaire



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  11. #9
    Quote Originally Posted by angelatc View Post
    I must say I am beginning to hear a lot of the same talking points I heard in 2007.

    Debt isn't bad, and the fundamentals of our economy are strong.

    We'll see, I guess.
    Indeed! The same talking points have been around for decades. Murray responded to them at least once that I know of, as did Hayek. (see "The Austrian Theory Of The Trade Cycle", compiled and edited by Clifford Thies)
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  12. #10
    Quote Originally Posted by CaptUSA View Post
    3 words: World's Reserve Currency

    If anything threatens that, the whole house of cards comes down. Which is why we spend crazy amounts on military and why certain nations are deemed "enemies".
    Exactly what I was thinking, ''debt , who cares, we have the best Military in the World''



    But I think the WSJ author is huffing his own ink.

  13. #11
    Quote Originally Posted by Superfluous Man View Post
    But investors should be concerned about expected future inflation, not just what the inflation rate has been comparing prices this year with last year.



    But why do investors continue to see Treasuries as low risk going on into the future? And how bad will the federal government's fiscal situation have to get before investors no longer consider treasuries low risk?

    What can't go on forever won't. At some point, the federal government is going to default in one way or another on some of its obligations, whether that be via inflation or other failures to fulfill promises. Once the expectations of investors are such that they start looking 30 years down the road and lack confidence that the federal government will still be able to pay all its obligations at that point without excessive inflation, Treasuries will need to offer higher interest rates to attract purchasers.
    For the last decade I have been surprised people even buy junk like treasuries . That would not pass the smell test if it was a share of stock . That said , the Price - earnings ratio on a lot of these over inflated stocks should be embarrassing too.
    Do something Danke

  14. #12
    The current on balance sheet debt doesn't matter even a little bit. The problem with MMT and Keynesian economics in general is it encourages taking resources away from the private sector, which is the productive sector. The problem is they think raising taxes is a way to control inflation. Those are the issues, not hyperinflation.

    We have about 20 trillion in GDP and 20 trillion in debt . If you changed that around and said you were a dentist making 200k with a 200k mortgage, would you be freaking out about crazy debt levels? The debt is backed by the ability to tax. The United States is an enormously productive economic engine.'

    Milton Friedman was way ahead of the curve on this. Here is shooting down a Republican debt doomsdayer in the 90's.


  15. #13
    Quote Originally Posted by Krugminator2 View Post
    The current on balance sheet debt doesn't matter even a little bit. The problem with MMT and Keynesian economics in general is it encourages taking resources away from the private sector, which is the productive sector. The problem is they think raising taxes is a way to control inflation. Those are the issues, not hyperinflation.

    We have about 20 trillion in GDP and 20 trillion in debt . If you changed that around and said you were a dentist making 200k with a 200k mortgage, would you be freaking out about crazy debt levels? The debt is backed by the ability to tax. The United States is an enormously productive economic engine.'

    Milton Friedman was way ahead of the curve on this. Here is shooting down a Republican debt doomsdayer in the 90's.

    That video was great.

    I just wish someone would have asked Friedman, "Given what you just said, would the ideal amount of government spending be zero?"

    I imagine he might have had an epiphany at that moment and replied, "I never thought of it that way. But come to think of it, yes."

  16. #14
    Quote Originally Posted by Krugminator2 View Post
    The current on balance sheet debt doesn't matter even a little bit. The problem with MMT and Keynesian economics in general is it encourages taking resources away from the private sector, which is the productive sector. The problem is they think raising taxes is a way to control inflation. Those are the issues, not hyperinflation.

    We have about 20 trillion in GDP and 20 trillion in debt . If you changed that around and said you were a dentist making 200k with a 200k mortgage, would you be freaking out about crazy debt levels? The debt is backed by the ability to tax. The United States is an enormously productive economic engine.'

    Milton Friedman was way ahead of the curve on this. Here is shooting down a Republican debt doomsdayer in the 90's.

    The higher your debtload the higher your income must be to keep up the payments, for the dentist that isn't too much of a problem because he adds value to the economy when he works to make more money but the government damages the economy when it taxes more to increase its income.

    The Constitution should have required supermajorities to authorize any debt and maybe only allowed it in times of declared war.
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  17. #15
    Quote Originally Posted by Superfluous Man View Post
    That video was great.

    I just wish someone would have asked Friedman, "Given what you just said, would the ideal amount of government spending be zero?"

    I imagine he might have had an epiphany at that moment and replied, "I never thought of it that way. But come to think of it, yes."

    He addressed that question numerous times. He says there are some government activities that are necessary for production. You need ways to enforce property rights. So he would be fine with courts, police, and military.

  18. #16
    Quote Originally Posted by Krugminator2 View Post
    The current on balance sheet debt doesn't matter even a little bit. The problem with MMT and Keynesian economics in general is it encourages taking resources away from the private sector, which is the productive sector. The problem is they think raising taxes is a way to control inflation. Those are the issues, not hyperinflation.
    One of the issues for any bank to consider is a run on the currency.

    Not having enough assets to meet liabilities is not a simple, "It's not an issue."

    It means they are bankrupt and are fraudulently siphoning away gains using other people's money.

    While I don't expect government school drones to wake up from an epiphany and declare that the banks cannot meet all of their obligations, it is still an unpredictable possibility which could arise rather quickly.

    We have about 20 trillion in GDP and 20 trillion in debt . If you changed that around and said you were a dentist making 200k with a 200k mortgage, would you be freaking out about crazy debt levels?
    GDP is misleading as it includes some government spending. That said your point is a fair one.

    Now imagine it like this: you own a warehouse. Your neighbor pays you to store their grain. You give them a receipt to prove that their grain is in safekeeping and for them to be able to come and collect their grain whenever they so choose. Your neighbor goes on vacation. You counterfeit a duplicate receipt and lend out their grain collecting payment on the loan. Upon return from vacation, the neighbors deposit of grain is reimbursed. The neighbor is none the wiser.

    Alternate ending: Maybe the neighbor doesn't go on vacation and simply stops in to retrieve his grain. Maybe the word on the town is the warehousing chairman is embezzling the grain for his own personal use or aggrandizement. Maybe when the grain warehouse opens, there are many customers there looking for their property. Maybe the fraud is found out.

    My point of the scenario is this: it is theft and that sustainability, or lack thereof, is immaterial. It is easy to say there will not be a run on the bank until there is one. It is easy to say that debt doesn't matter with insignificant and artificially low interest rates.

    Also one thing that your analogy fails to mention is the interest rate of the dentist's mortgage. Now artificial- three points... why not? He's living high on the hog. Now if interest rates were to rise (let's assume that the QE magic trick has been overplayed), the dentist who seems to be doing okay is no longer so high on the hog. He might find his standard of living dropping (or normalizing) as the market corrects. He might find his discretionary spending shrinking to cover his ever expanding obligations (say he paid people in the community to have dental work done and then used their money and added it to his salary to show how successful he was, well I digress).

    The debt is backed by the ability to tax. The United States is an enormously productive economic engine.'
    There is a limit to what can be taxed before it offsets any potential revenue gains to be had. This enormously productive economic engine could just as soon stall in the sea of funny money, debt, and regulation. As it has been.

    Milton Friedman was way ahead of the curve on this. Here is shooting down a Republican debt doomsdayer in the 90's.

    Thank you for the video.
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