I know the national debt is a boogeyman used by R’s to try to reduce spending to give more tax cuts to rich people. HOWEVER, this area has always been confusing to me because intuitively seems it would be unsustainable to perpetually expand national debt and you see tons of states / other countries eventually run into financial problems.
So where is the breaking point? I assume it’s something like when people no longer think loaning USA cash / buying bonds is a good idea, but practically speaking when is that?
This always confused me becuase it always seemed to me intuitively that huge deficits should ultimately work like a regressive tax. Basically it inflates/devalues all money equally at some point so it should disproportionally hurt the poor and rich people should be in favor of it. Seems like in practice it’s the opposite but I’m not sure why.
Not for a while I don’t think. The biggest holders of our debt* are other countries with Japan and China leading the way. We have big trade deficits. They end up with USD in their banks and government and not enough to do with it. They buy land (30 million acres or so) and companies, but a lot of it they just buy treasuries with and it’s a seller’s market so the returns are low.
*a plurality, but not more than half - if you break it down by banks, mutual funds, individuals, etc - foreign owned is like a third.
Fair. At a certain threshold though that’s got to invert though, right? Like if everyone’s net worth, salaries, etc, was reduced by 50 percent across the board becuase of inflation, the ultra rich aren’t really going to feel that in the same way as the middle class and below? I get their debt gets wiped away, but they also start having trouble paying for things with their take home money, don’t they?
You’re not wrong but this illustrates why inflation is a rich area of study and not “solved” by economics 101 thinking. Its interesting and even helpful to think of hypotheticals like “what if inflation was 100% overnight” but its not very instructive. In the real world inflation arises from system effects it basically CAN’T just move by itself. Its better to think of inflation in real life terms based on dials being turned in the economy by people with the power to turn dials.
What if central banks flood the economy with money supply causing inflation?
What if employers in a fight for talent increase spending on wages, causing inflation?
What if consumers express confidence by borrowing and increasing spending, causing inflation?
These scenarios have different impacts on different groups.
I think some inflation is ok but there is some point at which it becomes a huge issue. Federal bankers have decided 2-3% is that line. Not sure if there is a case for different levels or not.
As for debt, reading up on modern monetary theory is valuable. A pretty strong case can be made debt doesn’t matter until is gets to very high levels. Far higher than current levels.
The biggest thing is you can’t think of national debt like you think of personal debt. This conflation leads to 98% of bad policies and economic arguments.
I think it may be more accurate to say - higher than expected inflation helps borrowers and hurts lenders. Inflation in and of itself can be priced into the cost of borrowing.
If you owe the bank $1000 it’s your problem. If you owe the bank $100,000,000 it’s the banks problem if you owe $1,000,000,000,000 and you have nukes then it’s not a problem. The debt isn’t really a thing. It’s just meaningless numbers in a computer.
Indeed, but this is still also a very first order impact analysis. Most borrowers refinance their loans at some point so, yes, after an instantaneous theoretical one time shock the real value of their debt goes down. That’s good! But when they refinance they’re probably going to be looking at higher nominal interest rates. “That’s bad.” Households may also see nominally higher wages in an inflationary environment. “That’s good!” But they may see those gains evaporate with higher consumer prices. “That’s bad.” And the frogurt is also cursed.
