I'm of mixed feelings but there's an important point you missed on the austerity point. While you hinted around it in inflation helping the real debt, inflation also makes cutting spending way easier as a political prospect by "increasing" funding less than inflation.
I've been banging this drum for over two years now but Treasury's debt management strategy is misaligned. They seem to be more concerned about issuing new debt in the manner that works best the primary dealers bidding at auction, rather than looking for the best way to manage debt for taxpayers.
It was easy to see that those extremely low rates were a rare opportunity that was going to go away. Treasury should have been extending maturities and willing to take the slight premium from buyers, knowing that the additional premium would be much smaller than the rate increase from any sort of return to more normal interest rates.
It's not that simple but I can't quite wrap my head around it fully. The Fed isn't really in the business of making borrowing the cheapest for taxpayers, they have bigger priorities. Like keeping the economy going, not letting stagflation ignite, stopping the banking system from collapsing. Stuff like that.
If it is *good* for the taxpayers to lock in low rates at long terms, and I think that it is, then it must be *bad* for someone else. The institutions who borrow money at very long terms. Pension funds, things like that. Who else? Sovereign wealth funds perhaps? I can't imagine The Fed worrying about them much.
It's hard to imagine that they didn't at least think of borrowing long when money was cheap. I refied into low interest rate 30 year mortgages. There must be some good reason they did not. It's hard to imagine they just didn't think of it.
It probably has something to do with the Feds flexibility to manage short and long term interest rates. I just don't have the economic chops to come up with a good explanation though.
To be clear, I'm not talking about the Fed at all. I'm talking about the people in the Bureau of Fiscal Service at the Treasury Department that decide how much of each type of Bills, Bonds, Notes, etc. to sell each quarter.
The stated reasons that both Mnuchin and Yellen have given was that after talking to dealers they weren't sure there was strong demand for more longer term debt. However, there is clearly pretty good demand for longer term debt as other entities (universities and other countries like Austria) were able to sell 100 year maturity debt in that time period, and I find it very hard to believe that they would have risked anything close to a failed auction by selling more 30 year debt for instance. Again, the rate would be marginally higher than if they had issued lower amounts that were easily digestible, but the slight premium was clearly worth it at the time.
I just think it fundamentally shouldn't be Treasury's job to care about if pension funds, life insurance companies, other countries, dealers, etc. lose money from investing in Treasuries in the ups and downs of the market. They are in no way promising a loss-proof investment and those are all big boys who are able to make investment decisions on their own. Sometimes those investment decisions don't work out, and that's ok. If they were worried about future inflation destroying the value of the long-term Treasury they bought, they should have bought TIPS.
Yeah this is a slightly mind blowing to me. Average Joe Schmoe home owners were smart enough to refinance their mortgage and lock in low rates for 30 years but the brain trust at the Treasury couldn't figure that out?
Austerity is good if it is done properly. Implementing an X% across-the-board budget cut is lazy and irresponsible. But, just like most American households are doing now because of inflation, if you look for opportunities to get rid of things you have and/or are spending money on that “don’t bring you joy” you can find ways to get by without having to take on more debt. We need to run the government like we run our households.
At the risk of asking an obvious question: if the answer is "higher taxes," and the Republican Party is uniformly opposed to voting for higher taxes, and the filibuster still exists, then it seems like the only way to get to "higher taxes" requires Democratic control of Congress, something that is likely (though not guaranteed) to go away in the near future. What is the array of bad options that would be available to Republicans? Just slashing Medicaid and social security?
If Republicans ever decide to actually be the supply-side policy party rather than just play acting, there’s an enormous amount of highly inflationary regulation and government operation that could be addressed. Particular examples include:
NIMBYism
Immigration restrictions
NEPA reviews
Jones-Act type protectionism
State sanctioned monopolies (eg utilities, CoN laws for hospitals/nursing homes, etc)
I expect that they will go this route but do it badly because to do it well you really need to have the nerds and wonks on your side and they’re 90%+ Democrat.
Is that really true? Income taxes today on the median income are about 13%. Was it really that much higher in the 90s? I can't find data on this.
Overall taxes as a percentage of GDP are about the same, the rich are making much more money as a percentage of the economy than they did in the 90s and paying a slightly lower tax rate. So it doesn't seem like it should be true. Maybe we are just running bigger deficits and taxing the median less. I would believe it.
Tax increases can be passed via reconciliation. In fact, that is just what happened with the IRA. But, yes, it does require Democratic control of Congress (and the White House). For Republicans, the answer is: cut NPR and funding of Planned Parenthood, but otherwise deficits are just fine.
My concern with your analysis is that you never know when or if the debt markets will cut us off. These markets are more fickle than they appear to be. See for example what happened last week in the UK. Look at what happened in '08 with the MBS and the markets for similar debt products. These markets didn't simply slow down, they just abruptly stopped. Fortunately the Fed and Treasury were there to step in. Who would step in if the U.S. Treasury market got spooked in a serious way? I would not be too confident to think it would all work itself out, in light of our current fiscal trajectory.
It's a very interesting article, but a few points you are making go in the direction of this government debt being a (big) problem for the US :
- "Remember, inflation erodes debt of all kinds" : inflation does that by stealing money from the people and institutions who issued the debt in the first place. It's good for the borrower, but terrible for the lender. Many lenders are other countries with economic difficulties, and this will exacerbate their problem, which can in turn affect the US economy. The same is true for US individuals, companies and institutions who bought US bonds.
- "So if something doesn’t change in the next 4 years or so, we could easily be paying 80s levels of interest costs on the federal debt. In this sense, Druckenmiller’s warning is right.
So why am I not alarmed? Well, two reasons. First, interest rates probably aren’t going to stay high for that long. " :
The fact that a country has to rely on "everything happening according to the plan" to not be in a terrible situation is a big concern in itself. The security margin is thin, and a responsable government should not put his country in such a situation.
- "They say Social Security is the third rail of politics, but when the system was about to become unsustainable in the past, we quietly raised the retirement age. It’s likely that we’ll do this again. "
and
", how do we get austerity? The answer is “taxes”. Since World War 2, federal tax revenue has fluctuated between about 15% and 20% of GDP. We’re now at the middle of that range. So we’re going to have to go to the top of that range for a little while."
You are saying that the solution is 1) to lower government benefits, and 2) to raise the tax, which means the US will have a far worse quality/price ratio than before.
When people pay more to have less benefits, they are not happy. It creates revolts, encourage people to not follow the law, and even to emigrate to other countries, and it will do that exactly at the same time when :
- Internet allows people to easily work from other countries, and workers from other countries to compete with Americans for Americans jobs on the cheap
- Cryptos are rising and give people an alternative to the traditional system
- And even when new forms of government are emerging.
These disruptions definitely weren't happening in the 80's. My prediction is that all these things happening at the same time will make people less respectful of the Nation-State (in the US and elsewhere) and more motivated to look for alternatives, which exacerbate the problem.
Of course the government will be ok. The government is always ok. They make (and break) the rules as they see fit.
Barely mentioned in this “don’t worry” narrative is the impact of the government’s broken promises on real people’s lives. If you’re not entitled to “entitlements”, then what use are they? What is the opportunity cost of destroying trust?
To put it more bluntly:
It’s still we, THE PEOPLE, right?
If you think populism is a problem now, wait until the people discover the root cause of their suffering and lack of upward mobility: Endless currency debasement.
My dad just retired after a sixty year career. SIXTY YEARS! I would ask you how you think it will go for him, but you do not know. The answer is that he is well and truly fucked. Blame the boom-bust cycle for his situation, because every boom plants the seed of its own bust. There is no such thing as a soft-landing in the fiat monetary system. Undoing the perverse incentives caused by persistent monopoly money is necessarily painful, and always will be, forever and ever, amen.
Lots of real lives are obscured by macroeconomic equations that have little to do with reality. Conflating the CPI with “inflation” only works as long people actually believe the numbers. That’s becoming increasingly difficult as the number strays further and further from the reality of ACTUAL inflation-- namely “monetary inflation”. Also known simply as “inflation” until 1971.
By what standard is the CPI “inflation”? Shall we use the first, second, or third iteration? This is an important question, because the original methodology calculates “inflation” to be about 7% higher than reported today.
People are woefully ignorant, yes, but they KNOW the numbers don’t add up. And they will be angry when they learn the extent of the narrative economics (ie, lying) around inflation. Anybody who has to work for a living is having tough times. For everyone else, there’s the government’s Mastercard.
Moral arguments are not what you’re about, and I’m ok with that. It’s refreshing, to be honest. But at some point we must ask ourselves if it is worth destroying millions of lives to pay for government. If this is the “cost of civilization” (as I’ve been frequently told), then I’m calling bullshit. Why should I contribute my precious time to a government who doesn’t respect that sacrifice?
The truly terrifying "debt crisis" that is hiding in plain sight is that of private sector debt. And, to a significant degree, that crisis exists because the federal government isn't running large enough deficits. "Austerity" plus ever-more-grotesque levels of wealth and income inequality plus higher interest rates whose benefits accrue almost entirely to people who already have way too much unearned income to begin with is just a recipe for economic and political catastrophe.
Yeah I don't really see how all the promises made to future income can possibly all be kept. Either we have default or inflation in our future and inflation is less painful. These past two years of above average inflation have already cut 10% off the top off all debt owed, so that is a good start! As someone who has three large mortgages I am certainly grateful.
Maybe not a ticking time bomb, but I’d be a lot happier if the debt was 45% of GDP and only growing with GDP. We don’t seem to be demonstrating the will power to do much about that. I’ve always assumed higher taxes in my financial planning as we clearly can’t cut spending enough to fix the gap.
I'm thinking higher taxes (to drag back the gains that debt let the rich get over the last 50 yeard) is preferred to having the retirement age raise 8 years in only 25 years (62->65-> now 67 since Trump and the Reds are talking 70).
I do see what you’re saying. Being firmly in the camp that sees fairly collected and wisely spent taxation as an under-appreciated basis for civilization though I like the more positive framings and would reserve the use of ‘austerity’ for cuts to beneficial services, entitlements, investments and the like.
The corollary to these projections is the return of supply-side policy. There’s no chance that things like the Jones Act or NEPA will survive when the trade is those things vs. higher taxes for the middle class. Moreover YIMBYism will prove to be incredibly deflationary. There’s a ton of nonsense for policymakers to exploit that would let them avoid taxes - IF they bother to be interested in these issues.
I'm of mixed feelings but there's an important point you missed on the austerity point. While you hinted around it in inflation helping the real debt, inflation also makes cutting spending way easier as a political prospect by "increasing" funding less than inflation.
I've been banging this drum for over two years now but Treasury's debt management strategy is misaligned. They seem to be more concerned about issuing new debt in the manner that works best the primary dealers bidding at auction, rather than looking for the best way to manage debt for taxpayers.
It was easy to see that those extremely low rates were a rare opportunity that was going to go away. Treasury should have been extending maturities and willing to take the slight premium from buyers, knowing that the additional premium would be much smaller than the rate increase from any sort of return to more normal interest rates.
It's not that simple but I can't quite wrap my head around it fully. The Fed isn't really in the business of making borrowing the cheapest for taxpayers, they have bigger priorities. Like keeping the economy going, not letting stagflation ignite, stopping the banking system from collapsing. Stuff like that.
If it is *good* for the taxpayers to lock in low rates at long terms, and I think that it is, then it must be *bad* for someone else. The institutions who borrow money at very long terms. Pension funds, things like that. Who else? Sovereign wealth funds perhaps? I can't imagine The Fed worrying about them much.
It's hard to imagine that they didn't at least think of borrowing long when money was cheap. I refied into low interest rate 30 year mortgages. There must be some good reason they did not. It's hard to imagine they just didn't think of it.
It probably has something to do with the Feds flexibility to manage short and long term interest rates. I just don't have the economic chops to come up with a good explanation though.
To be clear, I'm not talking about the Fed at all. I'm talking about the people in the Bureau of Fiscal Service at the Treasury Department that decide how much of each type of Bills, Bonds, Notes, etc. to sell each quarter.
The stated reasons that both Mnuchin and Yellen have given was that after talking to dealers they weren't sure there was strong demand for more longer term debt. However, there is clearly pretty good demand for longer term debt as other entities (universities and other countries like Austria) were able to sell 100 year maturity debt in that time period, and I find it very hard to believe that they would have risked anything close to a failed auction by selling more 30 year debt for instance. Again, the rate would be marginally higher than if they had issued lower amounts that were easily digestible, but the slight premium was clearly worth it at the time.
I just think it fundamentally shouldn't be Treasury's job to care about if pension funds, life insurance companies, other countries, dealers, etc. lose money from investing in Treasuries in the ups and downs of the market. They are in no way promising a loss-proof investment and those are all big boys who are able to make investment decisions on their own. Sometimes those investment decisions don't work out, and that's ok. If they were worried about future inflation destroying the value of the long-term Treasury they bought, they should have bought TIPS.
Yeah this is a slightly mind blowing to me. Average Joe Schmoe home owners were smart enough to refinance their mortgage and lock in low rates for 30 years but the brain trust at the Treasury couldn't figure that out?
Just..... Why?
Austerity is good if it is done properly. Implementing an X% across-the-board budget cut is lazy and irresponsible. But, just like most American households are doing now because of inflation, if you look for opportunities to get rid of things you have and/or are spending money on that “don’t bring you joy” you can find ways to get by without having to take on more debt. We need to run the government like we run our households.
At the risk of asking an obvious question: if the answer is "higher taxes," and the Republican Party is uniformly opposed to voting for higher taxes, and the filibuster still exists, then it seems like the only way to get to "higher taxes" requires Democratic control of Congress, something that is likely (though not guaranteed) to go away in the near future. What is the array of bad options that would be available to Republicans? Just slashing Medicaid and social security?
Hmm. Good question, it's hard to say.
Yes which party is going to boost taxes? Let’s be real... nobody is going to raise taxes on midddle class.
If Republicans ever decide to actually be the supply-side policy party rather than just play acting, there’s an enormous amount of highly inflationary regulation and government operation that could be addressed. Particular examples include:
NIMBYism
Immigration restrictions
NEPA reviews
Jones-Act type protectionism
State sanctioned monopolies (eg utilities, CoN laws for hospitals/nursing homes, etc)
I expect that they will go this route but do it badly because to do it well you really need to have the nerds and wonks on your side and they’re 90%+ Democrat.
Bracket creep?
Yeah I can see them doing that, plus failing to adjust various spending items for inflation, etc. Stealth tax hikes and stealth spending cuts.
There’s no way. The median Americans pays a tiny fraction of the income tax they paid in the 90s, yet they also complain endlessly about taxes.
Both the far left and the entire Republican Party won’t let it happen.
Is that really true? Income taxes today on the median income are about 13%. Was it really that much higher in the 90s? I can't find data on this.
Overall taxes as a percentage of GDP are about the same, the rich are making much more money as a percentage of the economy than they did in the 90s and paying a slightly lower tax rate. So it doesn't seem like it should be true. Maybe we are just running bigger deficits and taxing the median less. I would believe it.
If you have the facts, I would appreciate them.
Tax increases can be passed via reconciliation. In fact, that is just what happened with the IRA. But, yes, it does require Democratic control of Congress (and the White House). For Republicans, the answer is: cut NPR and funding of Planned Parenthood, but otherwise deficits are just fine.
My concern with your analysis is that you never know when or if the debt markets will cut us off. These markets are more fickle than they appear to be. See for example what happened last week in the UK. Look at what happened in '08 with the MBS and the markets for similar debt products. These markets didn't simply slow down, they just abruptly stopped. Fortunately the Fed and Treasury were there to step in. Who would step in if the U.S. Treasury market got spooked in a serious way? I would not be too confident to think it would all work itself out, in light of our current fiscal trajectory.
It's a very interesting article, but a few points you are making go in the direction of this government debt being a (big) problem for the US :
- "Remember, inflation erodes debt of all kinds" : inflation does that by stealing money from the people and institutions who issued the debt in the first place. It's good for the borrower, but terrible for the lender. Many lenders are other countries with economic difficulties, and this will exacerbate their problem, which can in turn affect the US economy. The same is true for US individuals, companies and institutions who bought US bonds.
- "So if something doesn’t change in the next 4 years or so, we could easily be paying 80s levels of interest costs on the federal debt. In this sense, Druckenmiller’s warning is right.
So why am I not alarmed? Well, two reasons. First, interest rates probably aren’t going to stay high for that long. " :
The fact that a country has to rely on "everything happening according to the plan" to not be in a terrible situation is a big concern in itself. The security margin is thin, and a responsable government should not put his country in such a situation.
- "They say Social Security is the third rail of politics, but when the system was about to become unsustainable in the past, we quietly raised the retirement age. It’s likely that we’ll do this again. "
and
", how do we get austerity? The answer is “taxes”. Since World War 2, federal tax revenue has fluctuated between about 15% and 20% of GDP. We’re now at the middle of that range. So we’re going to have to go to the top of that range for a little while."
You are saying that the solution is 1) to lower government benefits, and 2) to raise the tax, which means the US will have a far worse quality/price ratio than before.
When people pay more to have less benefits, they are not happy. It creates revolts, encourage people to not follow the law, and even to emigrate to other countries, and it will do that exactly at the same time when :
- Internet allows people to easily work from other countries, and workers from other countries to compete with Americans for Americans jobs on the cheap
- Cryptos are rising and give people an alternative to the traditional system
- And even when new forms of government are emerging.
These disruptions definitely weren't happening in the 80's. My prediction is that all these things happening at the same time will make people less respectful of the Nation-State (in the US and elsewhere) and more motivated to look for alternatives, which exacerbate the problem.
WTF? Why didn't you even mention raising the cap on SSA contributions as part of the solution?
Here's a SSA policy brief on this subject: https://www.ssa.gov/policy/docs/policybriefs/pb2009-01.html
I have never understood why neither the Obama administration nor the Trump administration issued more 20 Treasury bonds.
Of course the government will be ok. The government is always ok. They make (and break) the rules as they see fit.
Barely mentioned in this “don’t worry” narrative is the impact of the government’s broken promises on real people’s lives. If you’re not entitled to “entitlements”, then what use are they? What is the opportunity cost of destroying trust?
To put it more bluntly:
It’s still we, THE PEOPLE, right?
If you think populism is a problem now, wait until the people discover the root cause of their suffering and lack of upward mobility: Endless currency debasement.
My dad just retired after a sixty year career. SIXTY YEARS! I would ask you how you think it will go for him, but you do not know. The answer is that he is well and truly fucked. Blame the boom-bust cycle for his situation, because every boom plants the seed of its own bust. There is no such thing as a soft-landing in the fiat monetary system. Undoing the perverse incentives caused by persistent monopoly money is necessarily painful, and always will be, forever and ever, amen.
Lots of real lives are obscured by macroeconomic equations that have little to do with reality. Conflating the CPI with “inflation” only works as long people actually believe the numbers. That’s becoming increasingly difficult as the number strays further and further from the reality of ACTUAL inflation-- namely “monetary inflation”. Also known simply as “inflation” until 1971.
By what standard is the CPI “inflation”? Shall we use the first, second, or third iteration? This is an important question, because the original methodology calculates “inflation” to be about 7% higher than reported today.
People are woefully ignorant, yes, but they KNOW the numbers don’t add up. And they will be angry when they learn the extent of the narrative economics (ie, lying) around inflation. Anybody who has to work for a living is having tough times. For everyone else, there’s the government’s Mastercard.
Moral arguments are not what you’re about, and I’m ok with that. It’s refreshing, to be honest. But at some point we must ask ourselves if it is worth destroying millions of lives to pay for government. If this is the “cost of civilization” (as I’ve been frequently told), then I’m calling bullshit. Why should I contribute my precious time to a government who doesn’t respect that sacrifice?
Asking for 300,000,000 friends.
The truly terrifying "debt crisis" that is hiding in plain sight is that of private sector debt. And, to a significant degree, that crisis exists because the federal government isn't running large enough deficits. "Austerity" plus ever-more-grotesque levels of wealth and income inequality plus higher interest rates whose benefits accrue almost entirely to people who already have way too much unearned income to begin with is just a recipe for economic and political catastrophe.
Yeah I don't really see how all the promises made to future income can possibly all be kept. Either we have default or inflation in our future and inflation is less painful. These past two years of above average inflation have already cut 10% off the top off all debt owed, so that is a good start! As someone who has three large mortgages I am certainly grateful.
Maybe not a ticking time bomb, but I’d be a lot happier if the debt was 45% of GDP and only growing with GDP. We don’t seem to be demonstrating the will power to do much about that. I’ve always assumed higher taxes in my financial planning as we clearly can’t cut spending enough to fix the gap.
I'm thinking higher taxes (to drag back the gains that debt let the rich get over the last 50 yeard) is preferred to having the retirement age raise 8 years in only 25 years (62->65-> now 67 since Trump and the Reds are talking 70).
Interesting, I was wondering when you’d get to taxes. I’ve never thought of them as a form of austerity though — if they’re being spent wisely.
The point is higher taxes *without* spending to go along with them.
I do see what you’re saying. Being firmly in the camp that sees fairly collected and wisely spent taxation as an under-appreciated basis for civilization though I like the more positive framings and would reserve the use of ‘austerity’ for cuts to beneficial services, entitlements, investments and the like.
The corollary to these projections is the return of supply-side policy. There’s no chance that things like the Jones Act or NEPA will survive when the trade is those things vs. higher taxes for the middle class. Moreover YIMBYism will prove to be incredibly deflationary. There’s a ton of nonsense for policymakers to exploit that would let them avoid taxes - IF they bother to be interested in these issues.