It's time to stop talking about "debt" as if it's actually any sort of debt, it's not. What we refer to as "US debt" is actually just money supply. When US "debt" is held by private individuals, it's just our savings. When its held by foreign governments, it's no different than holding cash.
Look at Japan, who has "purchased" their debt by printing money. These financial instruments are completely fungible. And it's fundamentally not "debt" because the US can *never* involuntarily default on the debt. And if the US did decide to default on some it's "debt," it would only be like burning some cash of the T-bill holder, instead of printing money to back it.
Foreign governments are gobbling up T-bills at *negative* interest rates. That's because more people want to be able to exchange things in dollars, and the T-bills are preferred to holding cash. We could also just print dollars, and get them out in circulation through government spending, or by buying back existing T-bills with those dollars.
Calling this stuff "debt" is just deceptive, and leads to bad policy. We need to start calling it "money supply." Our "debt" is really just printing money, with the side effect of the government setting the minimum borrowing rate that banks will borrow at. T-bills are just dollar bills with interest side effects.
> We need the top minds working on this now, not waiting until after disaster strikes and then analyzing it after the fact!
This sounds a lot like longtermist effective altruists' calls to work on reducing existential risks now, since we *cannot* wait until an "existential" disaster (either extinction or an equally bad outcome like the permanent collapse of civilization) destroys our whole future to start preventing it.
Inflation (and especially hyperinflation) is caused by spending beyond the productive capacity of the economy. It really only turns hyper if the government starts printing money but any excessive spending beyond capacity can trigger it.
Oh, and congratulations on excepting the core arguments of MMT. Kelton's response when people ask her this question is along the lines of 'Good question! that is what economists should be trying to calculate how much spare productive capacity we have, rather than trying to worry about irrelevant numbers.'
Let macroeconomists and economic historians do the work, but why not turn microeconomists off microfounded macro and onto the work of informing Congress and Fed which markets are tight and which slack or elastic so that inflationary spending can be avoided.
That's an interesting thought! But the number of microeconomists working on helping macro people find better microfoundations is very very close to 0...
I like that you attempt to wrestle with this question.
However, I find that right at the beginning of your logical train of thought you're immediately making an unfounded assumption: "If the U.S. federal government keeps borrowing and borrowing and borrowing without limit, eventually foreigners and private companies and citizens are not going to want to buy all of those Treasuries."
Why would this be true?
Consider this: If the government keeps borrowing and borrowing, then presumably they will also spend as much money as they borrow (there's a somewhat silly hypothetical where they keep borrowing and borrowing but don't spend any money -- but that seems overly silly even for the US political system, so let's ignore it!).
This means money gets into the hands of people, and more importantly, central bank money is moved onto the balance sheets of banks. The banks will want to get rid of this central bank money if possible since it doesn't bear interest, so buying treasury bonds with a non-zero interest rate will always be profitable for the banks. Which seems to imply that banks will always be willing to buy treasury bonds, which is the same as saying that the US federal government will always find borrowers.
No?
If not, then perhaps that's the very first thing that needs to be answered, before or at least in tandem with the other points you make.
There's an interesting question of: if this apply to the US, why doesn't it (seem to) apply to other countries. However, it might actually apply to all countries, at least to all that issue their own currency, and only borrow in it (i.e., what some people call monetarily sovereign).
If they are spending so much on interest payments that it could crowd out everything else, that could be solved easily by 1. Keeping the Fed Funds rate at 0 by having the fed constantly purchase treasuries (legally, they have to sell them and then buy them if they want to hold them). If the fed owns them they are required to forfeit any profits back to treasury . This essentially what Japan has been doing with its 'qqe with yield curve control.' Traders see Japan's national debt up around 200% GDP and bet against it all the time. Otherwise known as the widdow-maker. Or 2.Treasury could just pay them off with new cash instead of new treasuries. After all, it is only by convention that we create treasury bonds out of thin air when spending exceeds tax receipts. Outside of the subsidy to rich people we pay in interest on the treasury bonds they are functionally equivalent to cash.
If the banks think that the treasury bonds will be defaulted on, or that so much currency will be created that most of the real value of their yield will disappear, then they won't expect them to be profitable. They'd be better off buying tangible assets with that money (presumably through buying stocks) in terms of getting a return. Bond yields are pretty low - the only reason they're a good investment is that you're virtually certain to get a return.
So that brings us full circle: hyperinflation starts because people expect hyperinflation to start.
On a serious note, as of late I find macroeconomic concepts fascinating because of the immense amount of unknowns. Finance has much more solid evidence based backing, but macroeconomics doesn't seem to have that. AFAIK there is also no real agreement expert wide at to what money actually is. Depending on the interpretation of what money is you can possibly draw out a monetary policy which leads to lending or borrowing. But then this is very intertwined with the political economy. After reading The Elephant in the Brain I'm starting to think that many large economic concepts are taken for granted and that they make sense because of their aesthetic value, not real efficacy or efficiency. Dear reader, what are the books someone with modest economic knowledge read to educate themselves on the different aspects of this giant monstrosity we have? I'm versed in hypothetical markets and finance, but the actual implementations of those theories are wildly different than the Platonic ideals.
"we are not going to be able to formulate proper safeguards against government over-borrowing based on one IMF working paper that precisely 0.7 people will ever read"
At least two people have read this now, Noah. Thanks for sharing.
what's important in money velocity, which is related to inflation expectations. As long as people accumulate the paper money there is little inflation. Once they realise that the quicker they spend the money the better for them, inflation starts accelerating rapidly
The US$ may never hyperinflate because we all love dollars way too much. Much more than the actual stuff we can buy with them. That's why FED QE is going exponential, to keep up with us.
If inflation is triggered when the value of money exceeds the productive capacity of the economy then what impact does all advanced economies synchronously increasing debt and money supply have. If all currencies are devalued together then surely no one ends up devaluing in international trade.
I imagine social trust is a major factor. Japan is famously high-trust, while the sort of regime changes identified in the IMF paper would presumably have caused distrust in the government. After all, the economy is just a bunch of people having certain expectations of each other. Now, what is the level of trust going to be in the US going forward...
Thanks Noah. I've been raising this point lately with my own little voice. Policy-wise, the Democrats need a pragmatic economic answer to this question and politically, they need a pithy distillation of that answer. The deficit is clearly going to be a major point of Republican attack in 2022 and the Dems can't go intellectually and rhetorically defenseless against it.
Whether money is minted or printed or computer bits flipped, "maximizing revenue from seignorage" seems relevant because the constraint is the same, the real economy.
Inflation is caused by a shortage of resources, not an excess of money. As long as you have a sovereign currency, and DON"T borrow from other countries (like Venezuela did) and as long as you carefully target your spending (it's called management) the economy will expand to the benefit of all.
The flip would be a lack of demand and money velocity. So the question is why when so much money and debt has been created in so many countries for so long, is there no demand to result in any 'shortages'. We have anaemic GDP growth. Europe is almost stagnant.
Because mostly, due more to ideology than bad management (but that as well) the money has not been put into the hands of people that might actually spend it. Instead it's being given to those that don't need to spend any more than they are already, so the money ends up being locked away and being unproductive.
Ray Dalio has been spending a lot of time thinking and writing about this. While not a trained macro-economist, he does have access to them and he is obviously an expert in financial markets. I also think the popularity of Cryptocurrencies indicates more and more younger folks are, in fact, quite worried about this question while older folks, like me, have spent their formative years in the Volker era when we assume inflation won't be an issue. Point being, it might be harder for governments to push the envelope than it has been. Certainly hope the next generation is smarter than mine.
I feel a bit like the solution here is to distinguish between real and nominal debt. By that I mean how much 'borrowing' is just sloshing around financial markets and how much is actually pulling from actual GDP? Consider, imagine the gov't 'borrowed' and purchased everyone's mortgage. That's about 14T, maybe 60% of GDP. Does anything change? Not in the big picture. People still pay their mortgages, still gas up their cars, still buy Netflix and candy bars.
On the other hand, suppose the US borrowed 60% of GDP to build rockets to Mars. This would mean people would leave their jobs to work for contractors building the rockets. Instead of Tesla getting materials, the rocket companies would have to get materials. The non-rocket economy would have to contract while the rocket economy expands.
How much borrowing is just operating in the finance realm versus the real realm?
It's time to stop talking about "debt" as if it's actually any sort of debt, it's not. What we refer to as "US debt" is actually just money supply. When US "debt" is held by private individuals, it's just our savings. When its held by foreign governments, it's no different than holding cash.
Look at Japan, who has "purchased" their debt by printing money. These financial instruments are completely fungible. And it's fundamentally not "debt" because the US can *never* involuntarily default on the debt. And if the US did decide to default on some it's "debt," it would only be like burning some cash of the T-bill holder, instead of printing money to back it.
Foreign governments are gobbling up T-bills at *negative* interest rates. That's because more people want to be able to exchange things in dollars, and the T-bills are preferred to holding cash. We could also just print dollars, and get them out in circulation through government spending, or by buying back existing T-bills with those dollars.
Calling this stuff "debt" is just deceptive, and leads to bad policy. We need to start calling it "money supply." Our "debt" is really just printing money, with the side effect of the government setting the minimum borrowing rate that banks will borrow at. T-bills are just dollar bills with interest side effects.
> We need the top minds working on this now, not waiting until after disaster strikes and then analyzing it after the fact!
This sounds a lot like longtermist effective altruists' calls to work on reducing existential risks now, since we *cannot* wait until an "existential" disaster (either extinction or an equally bad outcome like the permanent collapse of civilization) destroys our whole future to start preventing it.
Yep, similar principle.
lol it me. And the long termist people have similar problems of having no data to work with.
:(
"Rapid Money Supply Growth Does Not Cause Inflation"
https://evonomics.com/moneysupply/ econometrics, not theory.
Inflation (and especially hyperinflation) is caused by spending beyond the productive capacity of the economy. It really only turns hyper if the government starts printing money but any excessive spending beyond capacity can trigger it.
Oh, and congratulations on excepting the core arguments of MMT. Kelton's response when people ask her this question is along the lines of 'Good question! that is what economists should be trying to calculate how much spare productive capacity we have, rather than trying to worry about irrelevant numbers.'
Let macroeconomists and economic historians do the work, but why not turn microeconomists off microfounded macro and onto the work of informing Congress and Fed which markets are tight and which slack or elastic so that inflationary spending can be avoided.
That's an interesting thought! But the number of microeconomists working on helping macro people find better microfoundations is very very close to 0...
Ha. I guess I was thinking about macroeconomists working on microfounded macro then.
Yeah, "microfoundations" are basically just macroeconomists making up micro! Hope they don't read this comment because they'll get MAD. ;-)
I like that you attempt to wrestle with this question.
However, I find that right at the beginning of your logical train of thought you're immediately making an unfounded assumption: "If the U.S. federal government keeps borrowing and borrowing and borrowing without limit, eventually foreigners and private companies and citizens are not going to want to buy all of those Treasuries."
Why would this be true?
Consider this: If the government keeps borrowing and borrowing, then presumably they will also spend as much money as they borrow (there's a somewhat silly hypothetical where they keep borrowing and borrowing but don't spend any money -- but that seems overly silly even for the US political system, so let's ignore it!).
This means money gets into the hands of people, and more importantly, central bank money is moved onto the balance sheets of banks. The banks will want to get rid of this central bank money if possible since it doesn't bear interest, so buying treasury bonds with a non-zero interest rate will always be profitable for the banks. Which seems to imply that banks will always be willing to buy treasury bonds, which is the same as saying that the US federal government will always find borrowers.
No?
If not, then perhaps that's the very first thing that needs to be answered, before or at least in tandem with the other points you make.
There's an interesting question of: if this apply to the US, why doesn't it (seem to) apply to other countries. However, it might actually apply to all countries, at least to all that issue their own currency, and only borrow in it (i.e., what some people call monetarily sovereign).
First off most large banks are legally obligated to bid on all treasury auctions.
https://www.newyorkfed.org/markets/primarydealers
If they are spending so much on interest payments that it could crowd out everything else, that could be solved easily by 1. Keeping the Fed Funds rate at 0 by having the fed constantly purchase treasuries (legally, they have to sell them and then buy them if they want to hold them). If the fed owns them they are required to forfeit any profits back to treasury . This essentially what Japan has been doing with its 'qqe with yield curve control.' Traders see Japan's national debt up around 200% GDP and bet against it all the time. Otherwise known as the widdow-maker. Or 2.Treasury could just pay them off with new cash instead of new treasuries. After all, it is only by convention that we create treasury bonds out of thin air when spending exceeds tax receipts. Outside of the subsidy to rich people we pay in interest on the treasury bonds they are functionally equivalent to cash.
If the banks think that the treasury bonds will be defaulted on, or that so much currency will be created that most of the real value of their yield will disappear, then they won't expect them to be profitable. They'd be better off buying tangible assets with that money (presumably through buying stocks) in terms of getting a return. Bond yields are pretty low - the only reason they're a good investment is that you're virtually certain to get a return.
So that brings us full circle: hyperinflation starts because people expect hyperinflation to start.
I don't think anyone has complemented you in this way before, but based.
On a serious note, as of late I find macroeconomic concepts fascinating because of the immense amount of unknowns. Finance has much more solid evidence based backing, but macroeconomics doesn't seem to have that. AFAIK there is also no real agreement expert wide at to what money actually is. Depending on the interpretation of what money is you can possibly draw out a monetary policy which leads to lending or borrowing. But then this is very intertwined with the political economy. After reading The Elephant in the Brain I'm starting to think that many large economic concepts are taken for granted and that they make sense because of their aesthetic value, not real efficacy or efficiency. Dear reader, what are the books someone with modest economic knowledge read to educate themselves on the different aspects of this giant monstrosity we have? I'm versed in hypothetical markets and finance, but the actual implementations of those theories are wildly different than the Platonic ideals.
"we are not going to be able to formulate proper safeguards against government over-borrowing based on one IMF working paper that precisely 0.7 people will ever read"
At least two people have read this now, Noah. Thanks for sharing.
what's important in money velocity, which is related to inflation expectations. As long as people accumulate the paper money there is little inflation. Once they realise that the quicker they spend the money the better for them, inflation starts accelerating rapidly
The US$ may never hyperinflate because we all love dollars way too much. Much more than the actual stuff we can buy with them. That's why FED QE is going exponential, to keep up with us.
If inflation is triggered when the value of money exceeds the productive capacity of the economy then what impact does all advanced economies synchronously increasing debt and money supply have. If all currencies are devalued together then surely no one ends up devaluing in international trade.
I imagine social trust is a major factor. Japan is famously high-trust, while the sort of regime changes identified in the IMF paper would presumably have caused distrust in the government. After all, the economy is just a bunch of people having certain expectations of each other. Now, what is the level of trust going to be in the US going forward...
Thanks Noah. I've been raising this point lately with my own little voice. Policy-wise, the Democrats need a pragmatic economic answer to this question and politically, they need a pithy distillation of that answer. The deficit is clearly going to be a major point of Republican attack in 2022 and the Dems can't go intellectually and rhetorically defenseless against it.
> But how eventually is “eventually”? We have no idea.
Here's one paper on maximum seignorage/hyperinflation, maybe others in the cites are also relevant https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3141272
Whether money is minted or printed or computer bits flipped, "maximizing revenue from seignorage" seems relevant because the constraint is the same, the real economy.
Inflation is caused by a shortage of resources, not an excess of money. As long as you have a sovereign currency, and DON"T borrow from other countries (like Venezuela did) and as long as you carefully target your spending (it's called management) the economy will expand to the benefit of all.
The flip would be a lack of demand and money velocity. So the question is why when so much money and debt has been created in so many countries for so long, is there no demand to result in any 'shortages'. We have anaemic GDP growth. Europe is almost stagnant.
Because mostly, due more to ideology than bad management (but that as well) the money has not been put into the hands of people that might actually spend it. Instead it's being given to those that don't need to spend any more than they are already, so the money ends up being locked away and being unproductive.
Ray Dalio has been spending a lot of time thinking and writing about this. While not a trained macro-economist, he does have access to them and he is obviously an expert in financial markets. I also think the popularity of Cryptocurrencies indicates more and more younger folks are, in fact, quite worried about this question while older folks, like me, have spent their formative years in the Volker era when we assume inflation won't be an issue. Point being, it might be harder for governments to push the envelope than it has been. Certainly hope the next generation is smarter than mine.
I feel a bit like the solution here is to distinguish between real and nominal debt. By that I mean how much 'borrowing' is just sloshing around financial markets and how much is actually pulling from actual GDP? Consider, imagine the gov't 'borrowed' and purchased everyone's mortgage. That's about 14T, maybe 60% of GDP. Does anything change? Not in the big picture. People still pay their mortgages, still gas up their cars, still buy Netflix and candy bars.
On the other hand, suppose the US borrowed 60% of GDP to build rockets to Mars. This would mean people would leave their jobs to work for contractors building the rockets. Instead of Tesla getting materials, the rocket companies would have to get materials. The non-rocket economy would have to contract while the rocket economy expands.
How much borrowing is just operating in the finance realm versus the real realm?