The bogus national debt crisis

This is an argument I first heard about from Jack Kemp, Republican vice-presidential candidate in 1996 – namely, that there’s no such thing as too much national debt.

The basic argument is simple: the United States has a fiat currency system, unlike say Greece which relies on external currency (the Euro). Plus, what about inflation? Well, the United States dollar is also the global currency reserve.

The more detailed argument is here by that famously leftwing extremist rag, Forbes Magazine. Quote:

another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)

and of course there’s the example of Japan, whose debt is 229% of GDP and yet will never, ever default. Ever. (and their currency isn’t a global reserve currency, either).. link courtesy of that socialist grinder, Business Insider Magazine.

SO, yeah let’s try to get the deficit under control, because after all we are wasting a few hndred billion a year on interest payments that we could be using for better things (like high speed rail, covering the uninsured, R&D for science, etc). But is there a debt crisis? Will we become Argentina or Greece? No. Will China own us? No. Will American civilization collapse? well, maybe, if the fanatics get their wish and enact austerity measures that shrink our GDP and obliterate teh social safety net for our most vulnerable citzens. But that’s got nothing to do with debt.

And will our children pay for the debt today? No. They will be paid – in the form of genuine opportunity for social mobility. Because thats what that debt is doing – paying an investment down, for a better future.

(cross-posted to Dean 2016)

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  • Aziz Poonawalla

    As it turns out, in 2010 the US Treasury actually issued bonds with negative interest rates, and they still sold out.

    people are willing to PAY the US Govt for the privilege of lending the USA money!

  • fche

    “There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars.”

    That begs the question. If the US feds inflate the dollar toward garbage, that cannot remain true. Other countries no more want to see their savings lose value through inflation than do local citizen bondholders. So if your theory is founded on the theory that the rest of the world will always stay stupid, let’s just say this is not economic bedrock you’re building on.

  • fche

    “Because thats what that debt is doing – paying an investment down, for a better future.”

    What do you imagine is a limiting factor in procuring this certain better future? Why not spend $10T/year? Why not $100T?

  • Aziz Poonawalla

    network effect.

    and yes, there probably is an upper limit to what we can spend before the dollar’s status as reserve is threatened, but we are nowhere near that level at all. We certainly arent there now because demand for teh dollar is still rapacious.

    And if we did go to that extreme, it wouldnt happen overnight, and the reaction time would be on legislative timescales, so we could course correct. Its absurd to say that just because yes, theoretically at 100T a year the argument falls apart because we arent anywhere close to that boundary condition.

    You know, all this debt alarmism really is just hastening the inevitable VAT (or X-Tax alternative). .

  • fche

    “… we could course correct”

    What sort of bearable “course correction” do you imagine for those circumstances?

    “this debt alarmism is just hastening the inevitable VAT”

    How is that? If the debt / deficit is not a problem, what would make a massive new tax inevitable?

  • Elisha Feger

    …so why do we have taxes?

  • jaymaster

    I actually agree with you on this, Aziz!

    The only real threat from excess government debt (In the US, England, Japan, etc, those being currency issuers) is from inflation. But IMO, we’re far from that point at the moment.

    I didn’t believe this 3-4 years ago. But I’ve read heavily, and now I do.

    I recommend this site as a good place to start.

    And this paper in particular:

    Or its more focused sister site (though it’s more wonkish):

    I would imagine that we might disagree with some of the ramifications though.

    I’m in favor of cutting taxes to the bone right now, because I believe individuals can collectively make better long term economic decisions than government bureaucrats. But I’m not against government spending in some cases such as increased infrastructure or defense spending.

  • Aziz Poonawalla

    What sort of bearable “course correction” do you imagine for those circumstances?

    several waves. The first would be establishment driven; Alan Greenspan and Timothy Geithner and the rest of those old titans of finance. These are actually smart people. They know when to raise interest rates and when to lower them. Presumably as inflation started being a problem (far, ar afield of where we are now on debt, though) they would begin to apply the brakes. Timescale: months.

    Suppose though that for some reason these people suddenly turned into raving ideologues overnight. Then of course the political system would have to respond. Right now fiscal conservatism is Cassandra, claiming that debt will turn us into Greece. Rightly, those voices are marginalized (and read the link I provided about Japan, btw…). If inflation were to suddenly start lurching upwards, the entire basis for fiscal conservatism would suddenly be rejeuvenated. The very next House election would be a referendum. Timescale: 2 years.

    And of course if that doesn’t suffice then there is the Presidential election process which as we just saw in November is a reerendum on the governing party’s economic policy. Obama won; elections have consequences. In our hypothetical future of higher debt to GDP and sudden increases in inflation, which neither the Fed’s raising interest rates nor turnover in the House could ameliorate, well then the challenger for the White House has a credible case (far mroe so that the overwrought claims of damage that Romney tried to make). Timescale: 4 years.

    There’s a long, long way in terms of actual dollars as well as years to go before we get anywhere close to where Japan is right now. There’s plenty of maneuvering room. I’d say conservatively that a debt-GDP ratio of 200% is where we should start to slow down, and I’d be in favor of a legislative debt ceiling of 300% (tied to GDP, not an actual hard number in $T)

    Or, just enact a VAT or an X-tax. ( I’m really fine with that. That *is* inevitable if the trajectory of antidebt hysteria continues.

  • Scott

    Elisha and Jaymaster,

    Exactly, if what Aziz points to here is true (and isn’t his usual partisan delusional group-think*) then we should let the Federal government continue borrowing to sustain itself (even Obama’s massive increases in spending) and cut taxes. Not just continue the Bush-era tax cuts but cut them below that.

    If what Aziz says is true, the debt will be fine, we just need money in people’s hands (preferably their *own* money) right now.

    *Hey, you started it, Aziz with your comments by calling the budget-trimming GOP “fanatics”.

  • Aziz Poonawalla

    I believe individuals can collectively make better long term economic decisions than government bureaucrats

    long term decisions that pertain to individuals, yes. I agree. But I disagree when it comesto decisions for the common good. You don’t need to be widely read to have heard of the Tragedy of the Commons or the Prisoner’s Dilemma.

  • Aziz Poonawalla

    Jay – your link reminded me of this – i love the idea! The Trillion Dollar Coin

    I think i read about that at Ezra Klein a while back. Its actually a perfect example of why fiat means fiat.

    also, you may find this article copacetic:

  • Aziz Poonawalla

    Scott, im not arguing for infinite debt ratio. It does need to be capped, just not where we are now.

  • Aziz Poonawalla

    If the debt / deficit is not a problem, what would make a massive new tax inevitable?

    you misunderstand me. I am saying that ourpresent levels of debt are not a problem, that we could go far higher and that there are mechanisms in place that would kick in long before we netered dangerous territory with regards to inflation or our reserve currency status.

    However, if fiscal conservatives refuse to believe that, and insist that there is an imminent debt crisis and we are basically greece, then THAT argument WILL result in higher taxes, because we are already at the floor of domestic discretionary spending.

    The public spoke resoundingly a few weeks ago; they do not want deep cuts. Austerity will not happen. Ryan and Romney actually ran *against* Obama for proposing too many cuts to Medicare! (even though they included the same cuts in their budget). The dreaded sequester was implemented by Republicans and now they are frantic to avoid it. Fiscal conservatives were booted off House committees this week. If there’s a political reality in which spending is ever cut subsantially, it is in an alternate universe.

    So, fiscal conservatives are making the claim that debt is horrible and the public will not permit reduced spending. What’s left then? Increased revenue. QED.

    Insist on debt crisis, and you will get a VAT. Or issue a $5T coin and move on.

  • fche

    Aziz, your “bearable course correction” scenarios are talking electoral switches, not the actual policies to get away from the precipice, except that of raising interest rates. Why do you think that this qualifes as “bearable” with a much greater debt?

  • fche

    “So, fiscal conservatives are making the claim that debt is horrible and the public will not permit reduced spending. What’s left then? Increased revenue. QED.”

    The “public will not permit reduced spending” part may be true only because the election claimed that only others (“the rich”) would be made to pay for it. Once this delusion is deflated (with a VAT or whatever), this will not stay true.

    “Or issue a $5T coin and move on.”

    So why uis it that conservatives are laughed at when they remind the risks of hyperinflation? Right here, you and your kind are talking about deliberately triggering it.

  • Aziz Poonawalla

    the election claimed that only others (“the rich”) would be made to pay for it.

    at no point in the campaign, in not a single ad run by the Obama campaign nor any liberal superPAC, was it ever claimed that the rich would “pay for it”.

    Not one single source on the left has EVER claimed that a few percent tax rate increase on the uppermost bracket would actually pay for teh entire deficit.

    paying a fair share is not the same as paying FOR something, of course.

    Obama’s stimulus package was 40% tax cuts. Obama’s opening bid in the negotiations is a balanced approach, including over $300 billion in cuts to Medicare, not solely tax increases on the rich.

    If you retreat to caricatures of the other political side, then you’re even further removed from making a meaningful impact on future policy. Don’t go that route.

  • fche

    “at no point in the campaign, in not a single ad run by the Obama campaign nor any liberal superPAC, was it ever claimed that the rich would “pay for it”.”

    Depends on what “it” is, isn’t it. In the context of the present discussion, the left ran on “no tax increases to those making $250000 or below” – surely that is not a figment of my imagination. So those 90whatever percent below that line are led to think that whatever extra needs to be paid for, they won’t have bear the burden.

  • Aziz Poonawalla

    saying that the upper brackets are not paying their fair share is NOT the same as saying that taxing them would solve the debt crisis.

    “led to think” eh? only if you have a very low opinion of the rational capabilities of the lower class. I don’t. And I live in a battleground state so I saw the full fusillade of ads from both sides (not to mention incessant phone calls).

    the only side that made any reference to the debt was teh right, during the campaign. Obama didn’t run on the debt. His budgets have been moderate and he has proposed hundreds of billions in spending cuts, but as far as a campaign issue there was never any attempt by the left to argue that tax raises on the upper brackets would solve the debt. in fact teh debt was a nonissue for the left, as it should be.

    you may believe that the people voting for Obama did so out of spite for the rich, but even that rather cynical and condescending view is irrelevant to the debate on the debt.

  • Aziz Poonawalla

    your “bearable course correction” scenarios are talking electoral switches, not the actual policies

    re-read the paragraph that ends, “timescale: months”

    also, elections have policy consequences.

  • fche

    “Obama didn’t run on the debt. ”

    That is not the question at issue. It is that you seem to dispute that the non-“rich” have been told – repeatedly, by the left – that they would not have to pay more. If that is so (and it is), then the awesome “rational capabilities of the lower class” imply that they think someone else will. And if this “lower class” is then whacked with a VAT (as you propose), they will feel double-crossed, at which point you can no longer take the “they will not permit reduced spending” for granted.

    Regarding the timescale:months paragraph, I see “if inflation rises … apply the breaks”. In your own forecast – again with much larger debt – what would this consist of? Rising interest rates? How is that *bearable*?

  • jaymaster


    The trillion dollar coin concept was actually developed in the comment section of Prag Cap a couple years ago. They are talking about it again today.

    Some of it was also hashed out here:

    But there was a falling out within the group a few years ago that led to a bit of a philosophical shift. IMO, Mosler is still worth the read though.

    And yes, I get the tragedy of the commons thing. I’m not totally anti-government.

  • jaymaster

    One thing I forgot to add last night, these concepts only apply at the federal level, where the currency is created and managed. It won’t work for you or me, or for states or local governments.

    And it also won’t work in Europe, because their system was specifically devised to prevent it from happening. Many people pointed this out as a fatal flaw from the founding of the EU. Others thought it would be the glue that holds the Union together. Well, we’re in a real world experiment right now, and we shall see. The EU is figuring out some pretty creative ways to work around their own laws.

    But based on how the US economy has fared compared to Europe post recovery, the advantage has to go to the US system. At least for now…..

    And in theory, there is no major economic difference between deficit stimulus spending or deficit stimulus tax cuts.

    The best tools for stopping inflation if/when it gets out of control are tax increases and budget surpluses. But nobody likes to talk about that.

    Many folks on the left like to use taxes for redistribution/ “economic justice”. Many on the left and the right like to use them selectively as a tool to try to incentivize certain behaviors, and dis-incentivize others.

  • Dishman


    The bonds you referred to in your first comment are i-bonds. That means they’re inflation index. Those going over par means that the markets expect inflation to exceed the interest rate on t-bills of the same term.

    I wouldn’t treat that as such good news.

    As for the rest of supposed demand for our bonds, I’ll note that right now, the US Federal Reserve is one of the biggest purchasers of T-bills.

  • Scott

    Obama’s stimulus package was 40% tax cuts.

    Aziz, I know you’re not a “numbers guy” like me, but you are not entitled to your own facts.

    Even the left-leaning Politifact disagrees with you.

    So, our tax experts are skeptical that the $70 billion AMT fix should be included in the stimulus bill’s tax relief. That would bring down the cost of the tax cuts to about $218 billion. That means about 28 percent of the bill could be described as tax cuts, a little less than the one-third cited by Stewart.

    You really gotta stop spinning for “your guy”.

  • Paul S.

    Given the tone, I guess this is a political post, but I am going to respond from a financial and economic standpoint, which maybe you don’t care about and there is a lot here so I will probably wander, please bear with me.

    That Forbes article… yikes. I almost don’t even know where to start. The author is right about a few points, but from a big picture standpoint, I don’t think he really understands money and/or history of soveriegn defaults of which there have been literally hundreds, so lets not act like they are rare events. I’ll just go to his larger point that there is no threat of default because the US can print money. I suppose this is true, but only in a very trivial sense. This is is just another way of saying the US can simply inflate away the debt and pay back in worthless dollars. This is pure semantics! It does not matter if you took a haircut of 5% because of a “I’m not fully paying you back default” or a haircut of 5% because of purposeful currency debasement, the economic result is the same.

    The premise that being the reserve currency means that inflation is impossible is completely untrue, we had double digit inflation in the US in sequential years in the mid and late 70s. What on earth is he talking about?

    Japan is in serious trouble because of their debt, and this is exacerbated by their unfavorable demographics, but some hedge fund guy has had the market move against his short position for the past few years and this proof that Japan will never default? Japan appears to be attempting to inflate their deficit away as best they can, but that is still a default. (Side bar: those that were shorting subprime mortgage bonds had markets move against them for years, and many hedge fund investors were revolting against the managers who took such positions and threatened law suits to get their money back. You can be right and early at the same time.)

    But in reality, I do not think you can simply inflate away the debt. Once you start the inflation process, interest rates will rise proportionately with inflation, but you will not get an equivalent rise in GDP and certainly not in wages, and likely the most modest earners will lag even further behind, likely further angering the 99%. Moreover, when interest rates rise it is going to lead to a dramatic increase in the governments interest servicing cost, which means much less money to be spent on theoretically productive projects, like your high speed rail. I do not see how this is such a great gift to future generations.

    A couple of more comments:

    As Dishman notes, your link (from 2010) cites a TIPS (Treasury Inflation Protected Securities) auction, so the negative yields imply significant inflation concerns, not people wanting to lose money by lending to the government as you suggest.

    Interest rates are very low because the Fed is keeping them very low. The Fed is buying huge amounts of the newly issued debt, maybe more than 50%, (I’ll try and confirm) with a promise to buy uch more. This cannot go on forever. These low interest rates are extremely harmful to those nearing or in retirement who are now getting near zero yields on their bond investments. But at least these policies are propping up the stock market right? Exactly who are we helping here and at who’s expense?

    Our debt burden is dramatically understated not only because of the unfunded liabilities of medicare and SS, but also because of the understated losses on student loans and mortgages that are held by government agencies. Oh and of course we have broke states and their promised pension benefits that they cannot pay to beneficiaries. I don’t think it is a leap to assume the Federal government will step in and support those too.

    All of this is not to say or argue that we are in a serious European like debt crisis, we are not. But the current model is just not sustainable, and national debt does matter, even for a nation that is the reserve currency. I am not forecasting a debt crisis for the U.S. but there is non-zero probability that it happens in the next few decades. To argue that we need not do anything to redress these imbalances is irresponsible and only increases the probability that it does happen eventually.

    I am not one that believes America is heading down the crapper, I am not a gold bug who thinks we need to get back on the gold standard, but part of my job is to be right about this stuff, and the partisan bickering (on both sides) is shallow, boring, and distracting.

    (whoa it has been over a year since I commented at DW, guess I’m pent up!)

  • Hoffies

    The reserve currency stuff is nonsense. If you’re a developed country with your own currency then the national debt is a national non-issue full stop. How could you ever have a problem with debt if you could print the money it is paid in? The only check the government has on its spending is inflation; that is if it spends so much that aggregate demand begins to outstrip aggregate supply. But of course USA is in a recession at the moment so the current problem is exactly the opposite: aggregate demand is far below aggregate supply.

    Also Paul S. has no clue what he’s talking about. Japan has no debt problem; its public debt / gdp has been in the 200% range for at least a decade, and it’s been printing money non stop. But the Japanese have spending deficiency problem, and no amount of money printing has been able to convince them to spend; as such the Japanese economy has been operating below capacity (although not as far below as many believe) since the 90’s.

    None of this has anything to do with Left or Right in politics. It’s just facts. Cheney said “deficits don’t matter” and he was right.

  • fche

    ” The only check the government has on its spending is inflation; that is if it spends so much that aggregate demand begins to outstrip aggregate supply. But of course USA is in a recession at the moment so the current problem is exactly the opposite: aggregate demand is far below aggregate supply.”

    OK, so what happens if the recession ends at some point, and the debt has bloated even more in the mean time. Interest rates rise. Payment on the debt cannot be done without inflating it away. There’s your inflation problem.

    The status quo is on a razor’s edge, and more spending will only sharpen the razor.

  • Paul S.


    Your evidence that I have no clue seems to be that debt doesn’t matter because governments can print money without inflation as long as they are willing to stay in recession?? In other words, a recession is required to successfully monetize the debt, which suggests to me that deficits do matter. Or maybe you want to argue that recessions don’t matter.

    Given their high savings rates, it is not surprising that Japan has managed for over a decade, but I note that their GDP growth since 1980 averages a paltry +0.5%. They are not on a sustainable path.

  • Aziz Poonawalla

    Paul, you’re quoting an average arbitrarily from 1980 – but if you look at from 2001 onwards, Japan outperformed the US and the Euro zone.

    not sustainable? hogwash. Japan’s problem is too many elderly and taxes that are too low.

    and you are mischaracterizing Hoffie’s point, perhaps willfully. During recession, we can print money to cover debt and fund stimulus. That will end the recession. When recession ends, policy changes accordingly.

  • fche

    “… policy changes accordingly”

    “accordingly”? How many recessions have been followed by a significant cut in government spending? How many of those resulted in a balanced+ budget to repay the debts previously incurred?

  • Paul S.


    So my long post in comment #25 and a short follow up comment, and you pick at the “arbitrary” nature of 1980? Well isn’t choosing 2001 just as arbitrary? The decade of the 80s was Japan’s strongest economically, so I chose that time period for the express opposite reason that you assumed. And you preach about others not giving you the proper benefit of the doubt? If you want to talk about mischaracterization I would look no further than the first comment of this thread.

    Anyway, to echo fche’s question you are assuming that those policy changes will be implemented correcty and at the right time. What is the historical precedent for this?

    Further, we are out of recession and have been since June 2009. When do these policy changes begin taking place?

    (by the way, there have been 250 sovereign debt defaults since 1800, again lets not act like these are rare events)