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Memories of the 28th Century

The Coming U.S. Debt Crisis

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Debtors love inflation. The more they owe, the more inflation they want. That is because inflated dollars cost less, so the debtors can repay the same nominal amount for a lower value. That works whether you are a real estate developer or the U.S.A. The U.S. Treasury and the Federal Reserve Bank have been encouraging high inflation for a long time, so that the Treasury can pay off bonds with cheaper dollars. If inflation is running at average rate of 2.68% per annum, thirty year bonds can be paid off for about half of the face value, and the coupon rate has been decreasing all along.

But inflation varies for different classes of things. In 1970 an ounce of gold was worth $35, and today's price is $1291.40. That shows an average annual rate of appreciation of 7.64%. In contrast, the GDP deflator over that same period averages 6.3% per annum (compounded). In valuation, the measure that one uses determines the results that one gets, but considering what is lawful money in the U.S.A. I do not think that there should be as large a difference. The matter of what constitutes “lawful money is another can of worms, but I won't go into it now, even though it is a relevant matter.

The reason for this post is that it appears that there is pressure arising to further inflate the U.S. dollar. That appearance is because of the huge tax cut that Trump set up for his pals and himself. That is causing the budget deficit to balloon. To pay for the greater expenditures, the Treasury will have to emit more bonds, assuming that Congress will raise the debt ceiling. The greater debt will erode the value of the dollar, leading to more inflation, which will allow the Treasury Department to repay bonds for less value. One can question how long bond investors will tolerate that. The debt ceiling is currently $22 trillion, and the debt limit is just about equal to that; on 4/9/2019 it was $22,027,496,999,035.60. Unless Congress raises the debt limit there will be no more treasury bonds issued for a while. Until just now, I didn't realize that the debt situation was quite this bad.

There is one easy way to improve the debt situation of the U.SA., and that is to raise taxes. The tariffs that Trump imposed have had no effect, so the favor he did for his pals will have to be reversed, and it might be a nice to amend taxes so that everyone will pay the same rates.

The dollar has been losing value for as long as debt obligations have been emitted, but going into bankruptcy will tend to make the dollar lose much more value, and that is not good for a country that has been paying for itself with debt for a long time. There is no great reason for regaining lost ground in the value of the dollar, but to lose a significant part of its present value would damage its position as a reserve currency, and the drop in demand for the dollar in response to that would lower its value substantially, and this drop would be sudden, instead of being a little bit year after year. Or to be succinct, sovereign default would put the U.S. economy into freefall. This BBC article sums it up nicely.

The situation isn’t as bad as things were for the Weimar Republic mark, but if a cup of coffee suddenly costs $20, then there will be a problem, and by suddenly I mean in a couple of months.

Another thing we should fear is what the Italians called "scala mobile", which indexed all prices, wages, etc. to inflation and moved everything together. That seemed like a good idea when it was introduced, but it led to the Lira being worthless, and disparities slipped into it.

There is no easy way to get debt level under control, except to raise taxes and cut spending. Calvin Coolidge did it, and Eisenhower did to a lesser degree. I doubt that there are many politicians in Washington of any party who would be willing to annoy the masses of voters that way. I won't suggest who we should put into power, but we have to get rid of Trump.

And Bill Weld has made debt reduction and reducing the budget deficit. He lowered taxes and debt when he was governor of Massachusetts, and he may be able to do it for the country.

Updated 04-16-2019 at 05:05 PM by PeterL (clarity)



  1. PeterL's Avatar
    The Economist has similar concerns.