The US can issue currency to cover debt obligations. There should never be a situation where debts wouldn't be paid, the problem can just be printed away. The idea that the people who can print more money and pay the interest just wouldn't do it, out of what, spite? Incompetence? Seems pretty bad.
The fact that one party is always behind this financial profligacy, and the US keeps putting it in charge, probably means that the US' debt rating is still much too high.
> “This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the agency wrote.
Not all of them. There are TIPS which are inflation linked US treasuries. About 7%-10% of the total issuance, apparently. It would be higher but for unfavourable tax treatment.
If you issue currency you invite inflation (at least according to most economists), and there's an argument that it's better to screw foreign debt owners rather than make people who elect you unhappy.
From my basic understanding, this is indeed true. At the cost of rampant inflation, the US can simply print more currency, inflate away historical debts, and not have to default.
If the Moody's credit rating is a measure of the stability of the asset, then a downgrade makes sense. If its to measure the likelihood of a default -- it does seem unlikely the US would simply default.
What you are missing is fairly straightforward. Inflating away debt is a form of default. People don't want to lend you money when that is how you plan to pay it back -- same outcome as a default. I guess you could do it once but only if you plan to not borrow again.
Then you see the collapse of the global economic system as credit crashes and nobody can effectively transact business.
If you cant trust a currency, you have to revert to much more cumbersome and limiting contracts. e.g. loaning cash today to be repaid in gold tomorrow.
Furthermore, the undesirability of a currency severely limits the ability of governments to maintain economic stability.
It's true. Maybe, the consequences of doing so are so drastic and would ripple throughout the globe such that getting pennies on the dollar for debt obligations may be a more attractive approach but still a loss for creditors?
The bonds have a face value and a rate. That is what has to be paid. The fact that the money being used to make the payments might not be worth anything is a risk borne by the bond holders, but there will be no default.
However, if this becomes apparent, it will become increasingly difficult to find buyers for new bond issues.
Heh. You have a point on a technicality, but I can assure you that people, who lend other people money would likely be a lot less technical about it. In other words, the default may be a shorthand for 'immediately unable to borrow more at the previous rate', but I suppose it is not as catchy.
At the end of the day we either reign in the debt or the currency collapses and we're forced to reign in the debt. On a long timeline there is no way to not reign in the debt.
The US is effectively the world's bank. Everyone saying the US needs to cut its debt is basically saying, "The most successful bank in town needs to stop taking deposits," which seems like bad business for a bank. The debt is just the sum of deposits.
The problem isn't the debt, the problem is a lack of imagination/ambition in finding good investments for the capital that's being handed to the US. Saying the debt should be cut is saying "We're terrible at business, don't have good ideas, you all need to find smarter and more responsible people to entrust with your capital. We plan to underachieve."
Here's an example of how the government invests: the government uses the revenue from bonds to build a bridge. That bridge delivers returns on the investment in the form of tolls. These pay back the bonds with interest and continue to pay dividends to the government.
Another: the government uses bonds to build core infrastructure for a city. That infrastructure allows businesses to set up shop in the city. The business activity yields tax revenues, which pay back the bonds with interest and continue to pay dividends long term.
Multiply that by hundreds of thousands to millions of investments in infrastructure, people, services, etc.
That is common misconception, and far from the norm. Financially productive investments are a negligible part of the budget.
22% Social Security
14% Debt interest.
13% General Health
13% Medicare
13% National Defense
11% income security
5% Veterans Benefits
3% Education
2% Transportation
Most is a cost center, not revenue center. Keeping grandma alive isnt an investment. In fact, it incurs even more costs outside the budget.
Government spending = investment is a very poor heuristic. Most is simple consumption, the way buying a nice dinner is consumption, not an investment. That isn't to say it cant or shouldn't be done. The point of having money it so be able to enjoy nice things.
It is just important to not get lost in the sauce and forget the difference. Someone is always ready to argue a nice dinner is an investment because you cant work tomorrow without food. That makes it an expense.
(Nitpick: Bond revenues don't pay Social Security, Social Security pays Social Security. Bonds are actually bought with Social Security revenues.)
The rest of these investments in the citizenry do pay dividends. Not every investment is a simple matter of buying something which spits out money immediately. Spending on health and education is a long-term investment which returns higher tax revenues. Paying for national defense and caring for veterans is simply paying ourselves, that money continues circulating and yielding tax revenues. Even debt interest is paying ourselves! Most of the debt is internal, which just circulates the money around in the economy. Only something like 20% of debt is foreign owned, and that revenue still often comes back to us in to form of rolled-over bond purchases and trade.
In closing, the national debt is only a problem when we stop circulating currency. We can make the debt a huge problem by suddenly slashing productive investments in the deluded belief that we're a poor family which has racked up a big credit card bill.
RE SS: Social security has already crossed the point where SS expenses exceed SS tax revenue [1]. Interest on bonds purchased with SS tax revenue are paid out of general tax revenue.
I see two issues with what you said. First, what matters is the expected return and whether it's prositive. I can sell you an "investment" that pays dividends and raises revenues, but that doesn't mean it is net positive economically. I can spend $100 to raise revenue by $0.01 for 10 years. Is that an investment simply because some nonzero level of return?
Second, waving away debt as internal ignores the fact that interest recipients and payers are different. A family with a big credit card bill is also domestic debt and circulation. That is little consolation for the family spending an increasing portion of their budget servicing the debt, nor is it consolation that the money is being circulated by their banker paying their housekeeper. The internal "who" matters, especially when some people can run up the credit and check out before the bill comes do.
this is one of the most harmful ways of thinking to come out of the post-2016 era.
monetizing the debt is an effective default in the eyes of the market, nevermind economically disastrous. MMT idiocy caused major problems for the Biden admin and likely contributed significantly to Trumps reelection.
While I do not agree with it the common argument against indiscriminate money printing is inflation. Given that we are exiting an inflationary period and likely entering another it will be interesting to see what they say this time.
The fact that one party is always behind this financial profligacy, and the US keeps putting it in charge, probably means that the US' debt rating is still much too high.