Great article Noah! Amazing job explaining the difference between currency crises and debt-deflationary depressions.
In countries like Venezuela and Bolivia, they have economists that understand these issues, but rigid political systems prevent reforms. Sometimes, devoping country leaders often prefer blame external actors rather than enact necessary changes. This is worsened by a public that lacks macroeconomic understanding and is content with an artificially inflated standard of living built on draining foreign reserves or increasing dollar denominated debt.
As you highlighted with Bolivia, bad macro economic policies often lead to balance of payments crises. The result would be turning to the IMF.
Unfortunately, many in the developing world mistakenly believe the IMF causes these crises. While IMF policy prescriptions can sometimes create new challenges, the real issue often lies in bad policies the government does to make them borrow from the IMF in the first place (currency anchor, draining foreign reserves, lack of investment, declining exports, and foreign currency borrowing as you described). Then the leaders fail to take responsibility for their policies—like in my country Ghana, which has borrowed from the IMF over 17 times, yet continues to blame the institution rather than addressing systemic issues.
I also wrote about misconceptions of the IMF if anyone wants to read here. I take the same framework Noah Smith uses instead of conspiratorialism:
Indeed I have a crude understanding of economics but when I read this it seems to boil down pretty simply to don't buy on credit what you can't afford to pay back. I get that macroeconomics isn't the same as one's family finances but in the crudest terms, especially for these small developing nations with currencies that are insignificant on the global stage, maybe it kinda is!
In the case of Bolivia some of the initial spending may have been good investment. Morales deserves credit for funneling gas profits in some ways that benefitted the greater good. I've been there (beautiful! nice people!) and for example the expensive, imported gondola system serving the odd geography of La Paz was certainly making people's lives better. It worked quite well. Not a terrible use if money. But where do you go from there, to develop ahead of the debts you're taking on?
You got the answer right. For poor countries, a crude framework that "works" is "don't take on credit you can't pay back". The issue is you cannot predict future commodity prices. For example Nigeria depends on oil, and it's economy is half of what it was in 2014 because oil prices have dropped since then (in inflation adjusted terms).
Poor countries can't afford to take on debt and be inefficient. If a a country can't make roads or bridges or better farming on time to make more revenue from the investment to pay back the debt then they'll default.
When Nigeria borrowed to make a government owned shipping firm it was corrupt, bankrupt, and sold drugs. When South Korea did it, it made one of the best shipping industries on planet earth. South Korea went from the poorest Asian country to being one of the richest countries on earth.
This isn't a dig on Nigeria, but a point that countries don't know they are going to be unproductive with their debt before they take it.
My cynical self came up with another way for China to deal with its deflation problem. Just start a regional military conflict, which will inevitably spike producer prices due to economic sanctions, and at the same will generate demand for its defence industry, and by extension, plenty of other related industries. I would argue that the longer China's deflation issues persist, the more likely it is for a conflict to break out, especially if Xi thinks maintaining a big fiscal stimulus is expensive.
I am not saying this is the best way to do it, but given the way of thinking at China's leadership lately, you cannot rule out such a scenario.
Yep, that is scary. Xi doesn't have to worry about winning elections, but keeping people occupied and docile might require an alternative narrative to "common prosperity" when this is not working. I understand that Hitler's rearmament programme did wonders for Germany's economic revival, and cynics argue that Margaret Thatcher also benefitted from the Falkland's war, when her efforts to liberalise the UK economy were taking a toll on jobs...
The US is not currently experiencing either type of crisis. But we faced a disinflation crisis in 2008 and avoided one in 2020, through stimulus. With those behind us, and with the economic in rather good shape, we should be practicing austerity. The correct combination of tax increases and spending cuts is another argument, but we should be doing more of both.
Because no one actually wants to, with perhaps the exception of the Clinton years. Republicans like to talk about deficit reduction, but given the opportunity all they do is cut taxes and make deficits worse. Democrats generally can’t get excited about cutting spending. I hope AI, energy, biotechnology, and other new developments generate a lot of growth because we’re going to need it.
The federal spending machine operates on autopilot regardless of which party runs Congress and the White House. Back in 1986 under Reagan, the political appointee at the Economic Development Administration in the Commerce Department proposed abolishing his agency. Despite its modest budget in the tens of millions of dollars, the organization continued to exist, and its boss was removed. Nothing has changed. Hence, the Department of Education will remain unscathed.
Because no one actually wants to, with perhaps the exception of the Clinton years. Republicans like to talk about deficit reduction, but given the opportunity all they do is cut taxes and make deficits worse. Democrats generally can’t get excited about cutting spending. I hope AI, energy, biotechnology, and other new developments generate a lot of growth because we’re going to need it.
Fiscal "austerity" has been called for since 2021. The deficit is far greater than Σ(expenditures with NPV>0). And most of the adjustment need to come from revenue increases.
Exactly what _the Fed_ needs to do to get inflation back to its 2% PCE target is not clear. _My_ guess is that the December reduction in EFFR was a mistake, probably generated by not wanting to depart from the September "forward guidance" (which is why the Fed ought not give "forward guidance" about future movements in its monetary policy instruments). But at least it unsaid the "guidance of last September concerning 2025 EFFR management and is vague enough to allow the Fed to respond to Trump- or Musk-inspired fiscal pranks like tariffs, government shutdowns, or extension of the 2017 "Tax Cuts for the Rich and Deficits Act."
Quick question…why does most of the adjustments need to come from revenue increases? I agree that we need to increase revenue but it seems like we have completely blown spending through the roof as well…I would have thought a return to more typical spending (with maybe some increases due to defense needs and an aging society)with increased revenue would be more appropriate.
The problem is that our national debt is now so large, and with higher interest rates, we are spending ~$1 trillion per year just servicing the existing debt. I believe it’s about as much as we spend on the military.
A combination of tax increases, spending cuts, and perhaps lower interest rates to cushion the negative effects of austerity as well as reducing the cost to service short term debt is what’s really needed here. The current macroeconomic situation in the US seems ripe for that.
Or we can continue borrowing each year another 7 percent more than we have until it all blows up!
Funny that the Fed hasn’t said a peep about reckless fiscal policy for the past several years but now used “fiscal uncertainty” as a decision driver this week. I suppose they were comforted previously by the “certainty” of record deficits at full employment. Wonder what changed? Or is the new prez the same guy that the Fed greeted in 2017 and beyond, despite inflation below 2 pct, with 200 bp of rate hikes and QT after 8 years of near-zero rates and trillions in QE under Obama.
Amazing what electing a Repub can do- Fed govs suddenly remember economics and the media starts doing its job of confronting those in power. Vacation is over boys and girls!
Well, I sure hope Trump trims spending and deficits from the current unsustainable levels, but unfortunately I doubt it. They’ll be some splashy DOGE things that won’t amount to much and we’ll just keep on choogling.
Continuing current policy doesn’t increase the deficit .
That is status quo, but of course we don’t know what he is going to do. New corporate tax cuts on top of continuing the existing personal income tax is something he has discussed, which would increase the deficit from todays levels.
I see this as a feature not a bug of Republicans winning. I think Trump and most of Vivak/musks ideas are crazy but it’s nice to have a broad segment of society questioning how much power the executive branch has, actually researching the issues and challenging the establishment. I loved how after it became obvious that Biden was too old people started questioning trumps age (both were appropriate). However when the question of Biden’s mental acuity were not beyond obvious they avoided the issue for both candidates.
Long story short..with a broken and partisan intellectual class it helps it have the out of favor party in power if only to encourage them to do their jobs. Quick note…I am not including this blog as one of the broken media institutions…I subscribe because it tries to be intellectually consistent.
It's hard to make the case that 2008 was a deflationary recession in America. The CPI was -0.4% in 2009 (YoY avg) and there were only about 7 months of YoY deflation throughout that whole time period. Admittedly, this is unusual for America, and the recovery may well have been due to astute management and dramatic bailouts by the Fed. The US central bank has done some extreme things over the last 10 years, but they keep unwinding them and soft-landing the economy. Powell and Yellen et al have done well.
"macro will not be mocked" When you're the world's reserve currency, your "macro" is quite a bit larger than anyone else's, which gives you a bigger cushion for mistakes. Not endless though.
For me, the most interesting thing in Jay Powell’s presser was his revealing that many governors had guessed on fiscal policy when judging whether a weakening labor market or inflation was the looming direction.
It turns out that some of those governor models predicted inflation. This is why the rate cut wasn’t unanimous. What were the inflationary items? Powell didn’t say. But if I had to guess, Tariffs and spending proposals were added to their predictive modeling.
For now, the Fed has gone from worrying about the labor market to concern about inflation. Trump will read this as being a Fed now hostile to rate cuts. Trump could easily get hit with inflation; this time, he will be blamed.
Either tariffs or increases in the deficit are blameworthy because they reduce real income, not because they may or may not lead to Fed to inflate more than it would have.
Managing a currency sounds hard. Is it possible for a smallish country to give up and declare that their economy will run on US dollars?
One would have to acquire a lot of dollars to get things going, since you can’t print them. If you’re authoritarian-minded and your nation has high inequality, you might simply seize a bunch from whatever rich people are handy.
After that, though, you would seem to have unilaterally created a Eurozone situation with the US. I understand that not having control of the currency has been a periodic headache for less-affluent Eurozone members, but the lack of currency crises has been worth it.
What am I missing? Is there anything else besides personal and national ego preventing rulers of other nations from adopting the dollar?
The biggest issue is giving up independent monetary policy. By adopting a currency peg, regardless in what way exactly, you are making yourself exposed to monetary policy decisions taken somewhere else, which are not necessarily good for you. In the case of the euro area, the theory is that such decisions are taken with the participation of all member states, though in practice, the ECB accommodates policy mostly to the larger markets in the euro area.
It is why some non-Eurozone EU member states argue that before their economies converge more to the euro area average, joining it would be unwise. The issue is that the ECB cannot possibly tailor its decisions to each individual economy, so some will see higher policy rates than necessary, and some - lower.
Yet, if you are in a country that has gone through major currency crises, the tradeoff may be worth it. I would know, as I live in one, Bulgaria, which has had a currency board arrangement (a currency peg supported by foreign reserves) since 1997. It was the result of two major emergent market currency crises, in 1991 and 1996, the latter of which led to a brief period of hyperinflation and a 30-fold devaluation of the national currency in less than a year. The drawback is bigger economic cycle swings, as there are no monetary policy tools to dampen them, but the economy has been stable ever since.
Some nations have (or had) - Ecuador, El Salvador, Panama, Zimbabwe, etc. Once you dollarize you basically have no central bank that controls monetary policy. You basically export monetary decisions to U.S. federal reserve which may have different monetary goals than your country.
If Zimbabwe needs to boost exports (which it does), a way Vietnam or China or Japan has done that in the past is by making their currencies artificially weaker by selling their local currency and buying back the dollar to make their currencies weak and their products competitive internationally. If you are using the dollar you can't boost exports that way since you are dollarized.
Many of the cfa franc countries in africa have that issue since they are anchored to the euro.
Basically dollarization kills rampant inflation (which is good) but also kills export competitiveness (which is not good).
It all comes out in the wash- currency values reflect inflation. Think of how many zeroes Brazil has lopped off its currency over the last 40 years. I believe it is six zeroes so today’s R is 1/100,000 the value if the old cruzeiro. Think of how competitive Brazil’s exports must be! Those soybean farmers (and anyone else producing dollar-based exports) must be billionaire tycoons now in Brazil! And those Panamanians stuck with the Dollar can probably buy up half of Brazil for nothing. A t-shirt made in Brazil should be 1/100,000th of the price of a Panamanian shirt. Of course, none of this is true. Devaluation is almost always offset in time by inflation and delivers only very temporary benefits to exporters. Countries fall into the trap of repeated devals, afraid to risk countering the inflation their policy-makers have caused.
As you note, the big problem with using the Dollar or Gold or Walnuts is that the supply and financing costs of these items has no connection to your domestic economy (though over time your economy becomes connected to the walnut or dollar cycle, whether you like it or not). Probably better to have your own currency and run responsible fiscal and monetary policies (but it is hard - ask Biden).
Of course, the dollar is a lot better peg than gold because the $ is like having the gold supply controlled by alchemists, looking to pump out as much as possible!
In the long term, dollarization prevents a country from adapting to idiosyncratic shocks to its imports and exports, to manage its real exchange rate, the relation of the price of traded and non-traded goods. This was Greece's problem being tied to the Euro. (For a really small economy there are few non-traded goods so little is lost from the lack of flexibility.)
In the short term it means expending real resources to acquire a monetary base.
I think the bigger issue with Trump is that he makes a lot of stupid decisions which may not damage the US economy in the short run, but cause longer run problems which his successors then need to fix. I don't think he will precipitate a debt crisis: but he can decline to make it better (he would not be the only one to blame in that case of course). I don't think tariffs on their own will destroy the US economy, but it could set us back.
Overall, I think people poorly judge a President's performance. I am deeply skeptical, for instance, in Bill Clinton's performance. I am not entirely sure he did a great job setting us up for the 21st century. The economy performed well under Bill, but I am skeptical he had much to do with it.
And I assume you are also opposed to the stupid decisions Biden made (not responding to the border surge, adding to the deficit by forgiving stitch student’s loans, overspending on stimulus that created inflation, spending IRA money like crazy but not fixing permitting reforms so that broadband doesn’t connect anyone and only 7 EV charging stations get built, etc) that leave problems for all of us in the future.
I assume you are also very upset at all the stuff Trump did that was inflationary as well right? Most people who read this blog already agree that student loan forgiveness wasn't necessary and not dealing with the border surge was terrible...
You are either purposefully engaging in bad faith or only comment to try and defend poor GOP policies or the actions of people like Musk... But keep being contrary for the sake of being contrary mate...
So, essentially they over taxed the gas industry to the point where they couldn't be productive, to try to redistribute that money to non-producers? Sure sounds to me like socialism was the problem here.
'The causes of these are not as well-understood as the emerging-market currency crisis'
Actually they ARE pretty well understood. Freidman and Swartz figured it out. Monetary policy needs to insure sufficient inflation to adjust to the precipitating shock, something the Fed failed to do in 1929 and 2008.
"No matter how you set up the distribution of power and wealth inside your country, you will have to deal with those macroeconomic laws."
Not exactly. Bad macroeconomic policies can exacerbate problems and create new ones of their own, but often as with Bolivia and Venezuela the problems were _microeconomic._ Domestic savings and foreign borrowing were not invested in projects with NPV > 0. They are just making on a much grander scale the US error of deficits > Σ(expenditures with NPV>0). We just have better monetary policies.
This is a very insightful discussion. Thanks for making macro-economic dynamics simple and boldly clear. And yes, sadly, with relatively anarchic moves by MAGA/Musk/Trump to precipitate a federal budget crisis without a real Plan B, we are careening into unforced macro-economic error territory.
One suggested correction in your analysis: You said, "(In 2009-11, some economists who are used to studying emerging-market crises suggested cutting government deficits, but this would have been the wrong medicine.)" IT WAS MUCH WORSE THAN THAT. Both in the US (Obama's stimulus was restrained by Republican's and neoliberalism's ideologic economics and it was way to small) and in the EU (Merkel's proud and judgmental Germany insisted austerity was the correct response) after 2008, governments which did not understand what you just explained here made matters much worse.
In fact, one could say that the massive domestic harms (4 million homes lost, banks rescued with free money) caused by Obama's relative austerity greatly contributed to the popular discontent which produced MAGA success.
Correct. The fact that no bankers were even charged, much less imprisoned, for the 2007-2010 economic debacle greatly contributed to the rise of MAGA sentiment across the United States.
"If Bolivia is ever forced to abandon the dollar peg and the boliviano drops in value, this foreign-currency debt could become very costly to service."
No the cost to service the debt does not change. What changes in a currency crisis is that apparent real income that was being propped up by the drawdown in reserves falls. The change in the price of foreign goods in terms of domestic goods is the result, not the cause.
How often do you think President Musk, or his boards for directors, personally review every line-item of spending in the balance sheets of X, Tesla, or SpaceX? Like, almost certainly, never? And why is that? Seriously: Explain to me why that never happens.
Running a company is very different from a democratic government. In a company the CEO (who can be fired by the board) delegates budgeting to his department heads who are delegated spending authority, and relies on them to control spending, if they have out of control spending, or spending for benefit of their own department more than the company, then they can be disciplined or dismissed. This means the CEO can direct spending and keep it under control.
In government, as is shown by the 1500 page continuing resolution, which should be a couple pages that just say spending can continue for 3 months at the current rate, but instead is a compromise where each representative with clout adds in pork for their benefit (like the Iowa and Nebraska reps did to make E15 gasoline required in the summer ( which increase smog, uses tax money and has no other benefits ) to pay off their corn grower constituents, which then gets accepted by allowing the other side to add a similarly bad provision as “balance”. That’s how you get up to 1500 pages which are impossible to read before a final vote.
And then Noah complains about Elon shutting down the government for not going along with this crony bullshit bill.
I can't believe you really are out here believing that Musk is really just looking out for Senators here... They had negotiated the bill and had agreed to it and were on board with it before Trump and Musk decided they were against it.
The real things that Musk wants in the new bill is the removal of restrictions on outbound investment to China and to raise or abolish the debt ceiling which will help when the GOP passes tax cuts in a few months.
Oh and the new deal also basically fucks over farmers, hurricane victims and R&D funding..
Okay. That's about $1 million a page. Not counting Social Security and Medicare which Congress doesn't do anything on it budget or operational.
So 1.7 Trillion, US Budget. Also only 3x Musk's Net Worth.
Congress shouldn't get into that level of detail approval. They should delegate more detailed allocation to the executive branch and do oversight and review
The budget should be 10 pages per cabinet and Agency
It will be very interesting to see what the new Treasury Secretary Scott Bessent will do. Looking for information on his views, I came across this interview from a year ago on an investment podcast. Bessent, I think, does understand macroeconomics, as he and his mentors (Soros and Druckenmiller) have spent 4 decades making money off others' macroeconomic mistakes. I would like to think that he will be the adult in the room doing his best to avoid them for the US...
It seems (or did, a year ago) that the formula is "Reaganite" and growing out of debt through market-friendly policies to promote business investment and creation. That would fuel employement growth and consumer confidence, meaning nominal GDP grwoth will bring down borrowing and debt...But as far as I know, Reaganism and what came after was accompanied by the deflationary benefits of increasing globalisation (China and Eastern Europe), AND the demographic situation was starkly different. So dealing with inflation is going to be a tough challenge, it seems...For me one of the key questions is what they finally do on inmigration...Services still need people, and so does manufacturing...
Great article Noah! Amazing job explaining the difference between currency crises and debt-deflationary depressions.
In countries like Venezuela and Bolivia, they have economists that understand these issues, but rigid political systems prevent reforms. Sometimes, devoping country leaders often prefer blame external actors rather than enact necessary changes. This is worsened by a public that lacks macroeconomic understanding and is content with an artificially inflated standard of living built on draining foreign reserves or increasing dollar denominated debt.
As you highlighted with Bolivia, bad macro economic policies often lead to balance of payments crises. The result would be turning to the IMF.
Unfortunately, many in the developing world mistakenly believe the IMF causes these crises. While IMF policy prescriptions can sometimes create new challenges, the real issue often lies in bad policies the government does to make them borrow from the IMF in the first place (currency anchor, draining foreign reserves, lack of investment, declining exports, and foreign currency borrowing as you described). Then the leaders fail to take responsibility for their policies—like in my country Ghana, which has borrowed from the IMF over 17 times, yet continues to blame the institution rather than addressing systemic issues.
I also wrote about misconceptions of the IMF if anyone wants to read here. I take the same framework Noah Smith uses instead of conspiratorialism:
https://open.substack.com/pub/yawboadu/p/the-imf-part-2-how-the-fund-actually?r=garki&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true
Thanks for your succinct analysis.
I think you just explained that macroeconomics is... gravity.
Indeed I have a crude understanding of economics but when I read this it seems to boil down pretty simply to don't buy on credit what you can't afford to pay back. I get that macroeconomics isn't the same as one's family finances but in the crudest terms, especially for these small developing nations with currencies that are insignificant on the global stage, maybe it kinda is!
In the case of Bolivia some of the initial spending may have been good investment. Morales deserves credit for funneling gas profits in some ways that benefitted the greater good. I've been there (beautiful! nice people!) and for example the expensive, imported gondola system serving the odd geography of La Paz was certainly making people's lives better. It worked quite well. Not a terrible use if money. But where do you go from there, to develop ahead of the debts you're taking on?
You got the answer right. For poor countries, a crude framework that "works" is "don't take on credit you can't pay back". The issue is you cannot predict future commodity prices. For example Nigeria depends on oil, and it's economy is half of what it was in 2014 because oil prices have dropped since then (in inflation adjusted terms).
Poor countries can't afford to take on debt and be inefficient. If a a country can't make roads or bridges or better farming on time to make more revenue from the investment to pay back the debt then they'll default.
When Nigeria borrowed to make a government owned shipping firm it was corrupt, bankrupt, and sold drugs. When South Korea did it, it made one of the best shipping industries on planet earth. South Korea went from the poorest Asian country to being one of the richest countries on earth.
This isn't a dig on Nigeria, but a point that countries don't know they are going to be unproductive with their debt before they take it.
My cynical self came up with another way for China to deal with its deflation problem. Just start a regional military conflict, which will inevitably spike producer prices due to economic sanctions, and at the same will generate demand for its defence industry, and by extension, plenty of other related industries. I would argue that the longer China's deflation issues persist, the more likely it is for a conflict to break out, especially if Xi thinks maintaining a big fiscal stimulus is expensive.
I am not saying this is the best way to do it, but given the way of thinking at China's leadership lately, you cannot rule out such a scenario.
Yep, that is scary. Xi doesn't have to worry about winning elections, but keeping people occupied and docile might require an alternative narrative to "common prosperity" when this is not working. I understand that Hitler's rearmament programme did wonders for Germany's economic revival, and cynics argue that Margaret Thatcher also benefitted from the Falkland's war, when her efforts to liberalise the UK economy were taking a toll on jobs...
The same thought came to me as I was reading. I wonder if Putin's wars followed the same path.
A take on how Putin's adventure has affected Russia's arms industry.
https://www.youtube.com/watch?v=mo2yGXp2bnQ
The ending confused me a little bit. To be clear, here in the US, in our situation, austerity is the correct medicine, right?
Dosage matters, so probably not "crippling austerity", but "responsible austerity" would be good, wouldn't it?
The US is not currently experiencing either type of crisis. But we faced a disinflation crisis in 2008 and avoided one in 2020, through stimulus. With those behind us, and with the economic in rather good shape, we should be practicing austerity. The correct combination of tax increases and spending cuts is another argument, but we should be doing more of both.
How come the U.S. Government never reduces its expenditures during good economic times?
Because no one actually wants to, with perhaps the exception of the Clinton years. Republicans like to talk about deficit reduction, but given the opportunity all they do is cut taxes and make deficits worse. Democrats generally can’t get excited about cutting spending. I hope AI, energy, biotechnology, and other new developments generate a lot of growth because we’re going to need it.
The federal spending machine operates on autopilot regardless of which party runs Congress and the White House. Back in 1986 under Reagan, the political appointee at the Economic Development Administration in the Commerce Department proposed abolishing his agency. Despite its modest budget in the tens of millions of dollars, the organization continued to exist, and its boss was removed. Nothing has changed. Hence, the Department of Education will remain unscathed.
Because no one actually wants to, with perhaps the exception of the Clinton years. Republicans like to talk about deficit reduction, but given the opportunity all they do is cut taxes and make deficits worse. Democrats generally can’t get excited about cutting spending. I hope AI, energy, biotechnology, and other new developments generate a lot of growth because we’re going to need it.
Agree we are not in a crisis but both 2008 and 2020 for ill and for good were the Fed's blame and credit, not fiscal policy.
Yes, both.
Fiscal "austerity" has been called for since 2021. The deficit is far greater than Σ(expenditures with NPV>0). And most of the adjustment need to come from revenue increases.
Exactly what _the Fed_ needs to do to get inflation back to its 2% PCE target is not clear. _My_ guess is that the December reduction in EFFR was a mistake, probably generated by not wanting to depart from the September "forward guidance" (which is why the Fed ought not give "forward guidance" about future movements in its monetary policy instruments). But at least it unsaid the "guidance of last September concerning 2025 EFFR management and is vague enough to allow the Fed to respond to Trump- or Musk-inspired fiscal pranks like tariffs, government shutdowns, or extension of the 2017 "Tax Cuts for the Rich and Deficits Act."
Quick question…why does most of the adjustments need to come from revenue increases? I agree that we need to increase revenue but it seems like we have completely blown spending through the roof as well…I would have thought a return to more typical spending (with maybe some increases due to defense needs and an aging society)with increased revenue would be more appropriate.
The problem is that our national debt is now so large, and with higher interest rates, we are spending ~$1 trillion per year just servicing the existing debt. I believe it’s about as much as we spend on the military.
A combination of tax increases, spending cuts, and perhaps lower interest rates to cushion the negative effects of austerity as well as reducing the cost to service short term debt is what’s really needed here. The current macroeconomic situation in the US seems ripe for that.
Or we can continue borrowing each year another 7 percent more than we have until it all blows up!
Funny that the Fed hasn’t said a peep about reckless fiscal policy for the past several years but now used “fiscal uncertainty” as a decision driver this week. I suppose they were comforted previously by the “certainty” of record deficits at full employment. Wonder what changed? Or is the new prez the same guy that the Fed greeted in 2017 and beyond, despite inflation below 2 pct, with 200 bp of rate hikes and QT after 8 years of near-zero rates and trillions in QE under Obama.
Amazing what electing a Repub can do- Fed govs suddenly remember economics and the media starts doing its job of confronting those in power. Vacation is over boys and girls!
Well, I sure hope Trump trims spending and deficits from the current unsustainable levels, but unfortunately I doubt it. They’ll be some splashy DOGE things that won’t amount to much and we’ll just keep on choogling.
The plan is to increase the defect by extending the "Tax Cuts for the Rich and Deficits Act."
You are right about the Fed error of continuing to fail to achieve its 2% PCE target, before and after 2017 and until after the COVID shock.
Continuing current policy doesn’t increase the deficit .
That is status quo, but of course we don’t know what he is going to do. New corporate tax cuts on top of continuing the existing personal income tax is something he has discussed, which would increase the deficit from todays levels.
I see this as a feature not a bug of Republicans winning. I think Trump and most of Vivak/musks ideas are crazy but it’s nice to have a broad segment of society questioning how much power the executive branch has, actually researching the issues and challenging the establishment. I loved how after it became obvious that Biden was too old people started questioning trumps age (both were appropriate). However when the question of Biden’s mental acuity were not beyond obvious they avoided the issue for both candidates.
Long story short..with a broken and partisan intellectual class it helps it have the out of favor party in power if only to encourage them to do their jobs. Quick note…I am not including this blog as one of the broken media institutions…I subscribe because it tries to be intellectually consistent.
It's hard to make the case that 2008 was a deflationary recession in America. The CPI was -0.4% in 2009 (YoY avg) and there were only about 7 months of YoY deflation throughout that whole time period. Admittedly, this is unusual for America, and the recovery may well have been due to astute management and dramatic bailouts by the Fed. The US central bank has done some extreme things over the last 10 years, but they keep unwinding them and soft-landing the economy. Powell and Yellen et al have done well.
"macro will not be mocked" When you're the world's reserve currency, your "macro" is quite a bit larger than anyone else's, which gives you a bigger cushion for mistakes. Not endless though.
For me, the most interesting thing in Jay Powell’s presser was his revealing that many governors had guessed on fiscal policy when judging whether a weakening labor market or inflation was the looming direction.
It turns out that some of those governor models predicted inflation. This is why the rate cut wasn’t unanimous. What were the inflationary items? Powell didn’t say. But if I had to guess, Tariffs and spending proposals were added to their predictive modeling.
For now, the Fed has gone from worrying about the labor market to concern about inflation. Trump will read this as being a Fed now hostile to rate cuts. Trump could easily get hit with inflation; this time, he will be blamed.
Either tariffs or increases in the deficit are blameworthy because they reduce real income, not because they may or may not lead to Fed to inflate more than it would have.
Managing a currency sounds hard. Is it possible for a smallish country to give up and declare that their economy will run on US dollars?
One would have to acquire a lot of dollars to get things going, since you can’t print them. If you’re authoritarian-minded and your nation has high inequality, you might simply seize a bunch from whatever rich people are handy.
After that, though, you would seem to have unilaterally created a Eurozone situation with the US. I understand that not having control of the currency has been a periodic headache for less-affluent Eurozone members, but the lack of currency crises has been worth it.
What am I missing? Is there anything else besides personal and national ego preventing rulers of other nations from adopting the dollar?
The biggest issue is giving up independent monetary policy. By adopting a currency peg, regardless in what way exactly, you are making yourself exposed to monetary policy decisions taken somewhere else, which are not necessarily good for you. In the case of the euro area, the theory is that such decisions are taken with the participation of all member states, though in practice, the ECB accommodates policy mostly to the larger markets in the euro area.
It is why some non-Eurozone EU member states argue that before their economies converge more to the euro area average, joining it would be unwise. The issue is that the ECB cannot possibly tailor its decisions to each individual economy, so some will see higher policy rates than necessary, and some - lower.
Yet, if you are in a country that has gone through major currency crises, the tradeoff may be worth it. I would know, as I live in one, Bulgaria, which has had a currency board arrangement (a currency peg supported by foreign reserves) since 1997. It was the result of two major emergent market currency crises, in 1991 and 1996, the latter of which led to a brief period of hyperinflation and a 30-fold devaluation of the national currency in less than a year. The drawback is bigger economic cycle swings, as there are no monetary policy tools to dampen them, but the economy has been stable ever since.
Some nations have (or had) - Ecuador, El Salvador, Panama, Zimbabwe, etc. Once you dollarize you basically have no central bank that controls monetary policy. You basically export monetary decisions to U.S. federal reserve which may have different monetary goals than your country.
If Zimbabwe needs to boost exports (which it does), a way Vietnam or China or Japan has done that in the past is by making their currencies artificially weaker by selling their local currency and buying back the dollar to make their currencies weak and their products competitive internationally. If you are using the dollar you can't boost exports that way since you are dollarized.
Many of the cfa franc countries in africa have that issue since they are anchored to the euro.
Basically dollarization kills rampant inflation (which is good) but also kills export competitiveness (which is not good).
It all comes out in the wash- currency values reflect inflation. Think of how many zeroes Brazil has lopped off its currency over the last 40 years. I believe it is six zeroes so today’s R is 1/100,000 the value if the old cruzeiro. Think of how competitive Brazil’s exports must be! Those soybean farmers (and anyone else producing dollar-based exports) must be billionaire tycoons now in Brazil! And those Panamanians stuck with the Dollar can probably buy up half of Brazil for nothing. A t-shirt made in Brazil should be 1/100,000th of the price of a Panamanian shirt. Of course, none of this is true. Devaluation is almost always offset in time by inflation and delivers only very temporary benefits to exporters. Countries fall into the trap of repeated devals, afraid to risk countering the inflation their policy-makers have caused.
As you note, the big problem with using the Dollar or Gold or Walnuts is that the supply and financing costs of these items has no connection to your domestic economy (though over time your economy becomes connected to the walnut or dollar cycle, whether you like it or not). Probably better to have your own currency and run responsible fiscal and monetary policies (but it is hard - ask Biden).
Of course, the dollar is a lot better peg than gold because the $ is like having the gold supply controlled by alchemists, looking to pump out as much as possible!
In the long term, dollarization prevents a country from adapting to idiosyncratic shocks to its imports and exports, to manage its real exchange rate, the relation of the price of traded and non-traded goods. This was Greece's problem being tied to the Euro. (For a really small economy there are few non-traded goods so little is lost from the lack of flexibility.)
In the short term it means expending real resources to acquire a monetary base.
I think the bigger issue with Trump is that he makes a lot of stupid decisions which may not damage the US economy in the short run, but cause longer run problems which his successors then need to fix. I don't think he will precipitate a debt crisis: but he can decline to make it better (he would not be the only one to blame in that case of course). I don't think tariffs on their own will destroy the US economy, but it could set us back.
Overall, I think people poorly judge a President's performance. I am deeply skeptical, for instance, in Bill Clinton's performance. I am not entirely sure he did a great job setting us up for the 21st century. The economy performed well under Bill, but I am skeptical he had much to do with it.
And I assume you are also opposed to the stupid decisions Biden made (not responding to the border surge, adding to the deficit by forgiving stitch student’s loans, overspending on stimulus that created inflation, spending IRA money like crazy but not fixing permitting reforms so that broadband doesn’t connect anyone and only 7 EV charging stations get built, etc) that leave problems for all of us in the future.
I assume you are also very upset at all the stuff Trump did that was inflationary as well right? Most people who read this blog already agree that student loan forgiveness wasn't necessary and not dealing with the border surge was terrible...
Regarding permitting reform, you know who just killed that bill in Congress right? Regarding the 7 EV stations being built, I'm pretty sure that Pete B already responded to Elon about that here: https://www.yahoo.com/news/donald-trump-jr-gets-fact-220422323.html and here: https://www.bloomberg.com/news/newsletters/2024-11-27/elon-musk-falls-for-factually-challenged-attacks-on-ev-charger-funding. Even Musk admitted that he was basically wrong and knowing the details were helpful. Here is a Google Map showing NEVI-funded chargers’ status... The program’s end game is to have fast electric vehicle chargers installed coast-to-coast by 2030. Most recently in August, 29 states are getting in on the second round of funding valued at $521 million: https://www.google.com/maps/d/viewer?mid=1w_3fFphCsVAO4gw4By2R5wv_h7XzX0Q&femb=1&ll=47.18364223829618%2C-113.1376105&z=4
You are either purposefully engaging in bad faith or only comment to try and defend poor GOP policies or the actions of people like Musk... But keep being contrary for the sake of being contrary mate...
If I recall correctly we've sparred in the past and gotten nowhere
Good day sir
So, essentially they over taxed the gas industry to the point where they couldn't be productive, to try to redistribute that money to non-producers? Sure sounds to me like socialism was the problem here.
I haven't finished the article yet, but *this* is the super interesting econ content I subscribe for 👌
'The causes of these are not as well-understood as the emerging-market currency crisis'
Actually they ARE pretty well understood. Freidman and Swartz figured it out. Monetary policy needs to insure sufficient inflation to adjust to the precipitating shock, something the Fed failed to do in 1929 and 2008.
"No matter how you set up the distribution of power and wealth inside your country, you will have to deal with those macroeconomic laws."
Not exactly. Bad macroeconomic policies can exacerbate problems and create new ones of their own, but often as with Bolivia and Venezuela the problems were _microeconomic._ Domestic savings and foreign borrowing were not invested in projects with NPV > 0. They are just making on a much grander scale the US error of deficits > Σ(expenditures with NPV>0). We just have better monetary policies.
This is a very insightful discussion. Thanks for making macro-economic dynamics simple and boldly clear. And yes, sadly, with relatively anarchic moves by MAGA/Musk/Trump to precipitate a federal budget crisis without a real Plan B, we are careening into unforced macro-economic error territory.
One suggested correction in your analysis: You said, "(In 2009-11, some economists who are used to studying emerging-market crises suggested cutting government deficits, but this would have been the wrong medicine.)" IT WAS MUCH WORSE THAN THAT. Both in the US (Obama's stimulus was restrained by Republican's and neoliberalism's ideologic economics and it was way to small) and in the EU (Merkel's proud and judgmental Germany insisted austerity was the correct response) after 2008, governments which did not understand what you just explained here made matters much worse.
In fact, one could say that the massive domestic harms (4 million homes lost, banks rescued with free money) caused by Obama's relative austerity greatly contributed to the popular discontent which produced MAGA success.
Correct. The fact that no bankers were even charged, much less imprisoned, for the 2007-2010 economic debacle greatly contributed to the rise of MAGA sentiment across the United States.
"If Bolivia is ever forced to abandon the dollar peg and the boliviano drops in value, this foreign-currency debt could become very costly to service."
No the cost to service the debt does not change. What changes in a currency crisis is that apparent real income that was being propped up by the drawdown in reserves falls. The change in the price of foreign goods in terms of domestic goods is the result, not the cause.
"Elon Musk sabotaging efforts to keep the government running" : That sounds rather reductive.
The main reason Musk says he's opposed to the bill is that it's 1,500 pages long and senators have just a few hours to read it.
If anyone has a good counter-argument to this point, I'd love to hear it.
How often do you think President Musk, or his boards for directors, personally review every line-item of spending in the balance sheets of X, Tesla, or SpaceX? Like, almost certainly, never? And why is that? Seriously: Explain to me why that never happens.
Running a company is very different from a democratic government. In a company the CEO (who can be fired by the board) delegates budgeting to his department heads who are delegated spending authority, and relies on them to control spending, if they have out of control spending, or spending for benefit of their own department more than the company, then they can be disciplined or dismissed. This means the CEO can direct spending and keep it under control.
In government, as is shown by the 1500 page continuing resolution, which should be a couple pages that just say spending can continue for 3 months at the current rate, but instead is a compromise where each representative with clout adds in pork for their benefit (like the Iowa and Nebraska reps did to make E15 gasoline required in the summer ( which increase smog, uses tax money and has no other benefits ) to pay off their corn grower constituents, which then gets accepted by allowing the other side to add a similarly bad provision as “balance”. That’s how you get up to 1500 pages which are impossible to read before a final vote.
And then Noah complains about Elon shutting down the government for not going along with this crony bullshit bill.
The pork projects inserted into this bill reveal for whom the given politicians are whoring.
I can't believe you really are out here believing that Musk is really just looking out for Senators here... They had negotiated the bill and had agreed to it and were on board with it before Trump and Musk decided they were against it.
The real things that Musk wants in the new bill is the removal of restrictions on outbound investment to China and to raise or abolish the debt ceiling which will help when the GOP passes tax cuts in a few months.
Oh and the new deal also basically fucks over farmers, hurricane victims and R&D funding..
Bills are long, it is kind of their thing.
When you say « they » were on board, you mean what percentage of the Congress ?
And did the rest of the congressmen had time to read the bill ?
Chat GPT will give an adequate summary. :)
By Musk's logic no one would ever have a cell phone or account. :)
But maybe the sooner the sabotage comes to light, the better.
Okay. That's about $1 million a page. Not counting Social Security and Medicare which Congress doesn't do anything on it budget or operational.
So 1.7 Trillion, US Budget. Also only 3x Musk's Net Worth.
Congress shouldn't get into that level of detail approval. They should delegate more detailed allocation to the executive branch and do oversight and review
The budget should be 10 pages per cabinet and Agency
Congress oversees the purse strings of the US government, this is literally their job. Giving the executive branch more power is not a great idea...
It will be very interesting to see what the new Treasury Secretary Scott Bessent will do. Looking for information on his views, I came across this interview from a year ago on an investment podcast. Bessent, I think, does understand macroeconomics, as he and his mentors (Soros and Druckenmiller) have spent 4 decades making money off others' macroeconomic mistakes. I would like to think that he will be the adult in the room doing his best to avoid them for the US...
https://youtu.be/kSBkxsstbVg?si=ri6jfLFd7XYfHcRt
It seems (or did, a year ago) that the formula is "Reaganite" and growing out of debt through market-friendly policies to promote business investment and creation. That would fuel employement growth and consumer confidence, meaning nominal GDP grwoth will bring down borrowing and debt...But as far as I know, Reaganism and what came after was accompanied by the deflationary benefits of increasing globalisation (China and Eastern Europe), AND the demographic situation was starkly different. So dealing with inflation is going to be a tough challenge, it seems...For me one of the key questions is what they finally do on inmigration...Services still need people, and so does manufacturing...