Friday, November 20, 2020

John H. Cochrane - Debt Still Matters

Since it will some time before we know how the US political situation will pan out, here is an article by John H. Cochrane that may be of interest while we wait to find out if we end up with a divided government again or not. 

At this point, that is the one outcome from the elections that could have some impact on what we follow here. Right now, there is nothing to suggest any kind of major monetary system reform is on the near term horizon as a result of the US elections.

Below are some selected excerpts from the article and the and few added comments.


"In 2021, the United States is projected to pass a milestone: US federal debt is forecast to exceed 100 percent of GDP. In fact, according to an October estimate from the nonpartisan Committee for a Responsible Federal Budget, the debt has already eclipsed that mark. But does all this debt matter, or is worrying about debt passé?

This debate has been going on among economists for a while. Modern monetary theory has gotten a lot of attention for its arguments that debt has few consequences, but one need not go to the extremes of MMT to find support for such a view. Some in the mainstream of economics have argued that since the interest rate on US government debt may be lower than the growth rate of the economy, the US can roll over debt forever. Others have advocated that additional debt-financed spending may have so strong a multiplier as to pay for itself, a super-Keynesian version of the Laffer curve."

. . . . . 

"Everyone recognizes that there is a debt-to-GDP ratio limit out there somewhere. It is not a hard and fast limit. Bondholder patience combines government debt, other opportunities, and bondholders’ view of the government’s political stability and willingness to pay back debt. What is clear is that finding the limit will be unpleasant, involving essentially a sovereign debt crisis, a sharp inflation, devaluation, and financial catastrophe."

. . . . . .

"Still, what should we be afraid of? The vision of grandchildren saddled with taxes, or even just unable to borrow more while the economy sits at its limit of, say, 200 percent debt to GDP, is indeed not a salient brake to spending.

That is not the danger. The danger the US faces, the danger we should repeat and keep in mind, is a debt crisis. We print our own money, so the result may be a sharp inflation that wipes away the value of debt rather than an even more disruptive default, but the consequences will be almost as dire."

. . . . . .

'We cannot tell when the conflagration will come. But we can remove the kindling and gasoline lying around.  . . . . . ."

Please click here to read the full article on Chicago Booth


My added comments: This article is in line with what we have reported here for some time. Most economists seem to agree our present situation is not sustainable over time. However, no one seems to know just how much more "over time" we are talking about. 

Are we on the verge of some kind of implosion in the year just ahead? Or can we muddle along yet another 5-10 years with ultra low interest rates and a gradually increasing Debt/GDP ratio like this article talks about? This article says what we have said here. No one really knows the answer. The article notes that as long as we have "bondholder patience" and a well functioning printing press, the present system can just keep going. 

The purpose of this blog has been and is to watch for indications that the present monetary system cannot continue to muddle along and to watch for some kind of major reform or reset of the system. We'll continue to do that, but until something changes the status quo substantially, there may not be much to report. Meanwhile we will watch for news notes or educational type articles that may be worthwhile for readers. If it appears the final election results may impact potential change, we will do some kind of post election analysis in January 2021 after the remaining Senate races are concluded. Obviously, if we have continued divided government, that is likely to just support the status quo of the present system.

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