As an uneducated schub, I have only a limited grasp on macroeconomics. Can someone help me out with this?
As I understand the US economy right now…
If the interest rate goes up, the Federal budget is fucked because the payment on the debt will be unmanageable.
If the interest rate doesn’t go up, inflation will runaway and eat the value of the dollar until it is worthless.
Is this correct as far as it goes? What is the most likely outcome? The desired method of fixing this? The timeframe for the shit to hit the fan? If I do have this right, is gold the only safe haven?
full disclaimer: I am not an expert.
If the interest rate goes up, the Federal budget is fucked
It’s always manageable so long as they can borrow more by selling bonds. If they can’t sell bonds then yes the country is fucked.
the interest rate doesn’t go up, inflation will runaway and eat the value of the dollar until it is worthless.
It will not “runaway”. dollar value will go down initially which would automatically make every product US produces cheaper which will increase exports. Most people would suffer though.
So what does cause runaway inflation?
When it’s a failed country that doesn’t produce much if any thing.
In this case when currency goes down, its products become cheaper to export but there is not much available for export anyway.
There could be other reasons too like if a country is at war and is depleting its resources so fast.
Good explanation. The selling bonds part is optional, the federal government will always be able to service it’s debt because they can issue dollars through the treasury and the federal reserve. They don’t need a market to buy the bonds.
But doesn’t that by definition create inflation?
Yes it does. The challenge of US monetary policy is to keep the economy (GDP) growing more than inflation. Dollars spent that are effective at increasing growth are good investments, regardless of the level of national debt.
Oh. I think I might be getting it. As long as the debt payment isn’t crushing the budget, the GDP/Debt ratio doesn’t matter. Is that right?
Not exactly. I talk about their relative growth, not their relative size. The debt doesn’t matter. There is no specific amount of debt, either nominal, or expressed as a percentage of gdp, that is definitely too much. This is because the USD is the global reserve currency and it’s issued by the federal reserve, which is part of the US federal government. Imagine you’re the bank in Monopoly, and you also own the monopoly money printing machine. There is no way you can’t pay for something in monopoly money, because you can just print more if you need more. That kind of devalues the existing money supply, but that’s a gradual effect, there’s no specific limit that this means.
I guess the bigger picture: money isn’t real. People need goods, services and infrastructure, not money. The country is prosperous if it can allow its citizens to consume goods, use services and depend on infrastructure. Whether the debt is 100 or 10 or 1000 percent of GDP, does not matter. What matters is if we can keep increasing the amount of goods we produce, housing we build, etc. Problem comes when those things slow down. The housing crisis, for example, in not primarily because of high interest rates (rates are not high and the crisis was already on when rates were historically low). It is because there are not enough houses being built in the places where it’s needed, due to shortages of labor and materials (and zoning, but that’s for another discussion)Another way to put it. If we decided, technically we could buy back all treasury bonds from the market with money that didn’t exist yesterday (see QE that I linked previously, also google open market operations). The debt would go to zero. There is literally no technical reason not to do this. But, that would destroy money markets and the exchange rate of the USD, so we would need to stop buying goods from other countries, which would stop the economy… so it would be a very bad move. But I just want to make the point through that US government debt is really not like your family credit card debt.
The fed is primarily concerned with unemployment and inflation. Increasing the interest rate tends increase the unemployment rate, but reduce inflation. The fed generally tries to balance these out. Tangentially related to that is the looming issue of the size of debt payments by the federal government. The fed rate isn’t the entire factor for bonds, but it is part of it. If bond rates increase dramatically it could be a problem for the government as that could be the trigger for hyperinflation or stagnation, but that could also happen regardless of the fed rate.