- I think it’s fair to say that we’ve passed the “point of no return” on the straightforward repayment of our Federal debt. The point that happened is up for debate; I’m inclined to believe that it took place towards the end of the Obama administration, when the current Occupant was only Vice-Occupant (and occupying himself and his family with other matters.)
- We need to get real and admit that our current situation the result of a bi-partisan effort. Most of the real messes we’re in are of this nature. The Republicans trying to cast themselves as the champions of fiscal responsibility is unbelievable. Both the regular Republicans (Bush) and the irregular ones (Trump,) with the connivance of Congress (the opposite of progress,) have made their contribution to our debt. The former and current Occupants have done their part with the connivance of the same Congress. Buying votes with the people’s own money is simply too tempting to pass up.
- What’s on the table in the current “negotiations” is chump change.
- The only clear path to liquidating this debt (and you can dicker over its extent) is a long, steady inflation in the upper single digits/lower double digits with interest rates below the inflation rate. Some of this has already taken place. Unfortunately the Fed, bowing to the concerns of the Investors, has shut off this path, at least in part. This will result in an increase in the cost of servicing this debt while mitigating the decline in value of the principal. It has also led to the bank failures we are seeing now.
- The sanctions coming out of the war in Ukraine have convinced everyone else that it’s scary to deal in the USD. Getting out from under dollar hegemony won’t be easy or instantaneous but there’s an effort out there to find a way. The further that process takes place, the more “real” our Federal debt becomes. Americans are, as usual, talking in apocalyptic, cataclysmic terms about the recession of dollar hegemony, but it may well be a steady decline punctuated by intermediate disasters. A true “black swan” event would most likely be initiated by a really stupid decision by our government, and one can never rule that out.
- As one of my wife’s friends from West Virginia used to say, “Pray, saints.”
Sailing the Last Voyage with Newton and Pascal
Positive Infinity 
I agree that Federal debt levels are a problem but there’s a lot more uncertainty and possibilities here:
1) Japan has a debt over 200% of GDP (compared to what about 130 here?) and they seem ok for now. Britain went above that after the Napoleonic Wars, and they got out from that ok thanks to the Industrial Revolution. Debt creates a lot of fragility and inflexibility but in theory it doesn’t become a huge problem until debt servicing costs are hard to cover and start to choke off growth. 2). We do have huge looming entitlements as Baby Boomers retire, which make the situation much worse. But most of that comes from healthcare 3). So, one big possible solution would be to lower healthcare costs. We overpay badly for healthcare in America for worse outcomes compared to the rest of the G-7. If we simply started a price war among hospitals, providers, and big pharma that would save trillions and trillions of dollars. Of course, getting that kind of reform through Congress would be very, very hard, but it’s an option, and it doesn’t entail reducing access especially if we get better at prevention. 4). We got out from comparable debt levels after WWII through growth and higher taxes. Taxes are no fun, but we are at historically low levels post Reagan, Bush Jr, and Trump. We’ve also been at low GDP growth levels for the last forty years. If you can grow GDP faster than debt and avoid major wars, then debt will eventually go away. (This is why debt that finances higher growth can be good. If we increase productivity through funding infrastructure and research, those gains can more than pay for themselves in GDP.) 5). Unexpected inflation does lessen debt levels for a few years but eventually inflation expectations become anchored and interest rates rise accordingly. That means that interest payments go way up. So it’s actually pretty hard to inflate debt away. Not to mention the fact that inflation destroys wealth. But it is the path of least political resistance.
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All of what you say becomes more possible if we can break our governing elite’s aversion to real economic growth. That aversion is generally presented in terms of environmental salvation but is also the habit of oligarchies; economic growth depends on previously impecunious people moving up and creating wealth, which creates (in the minds of people at the top) the possibility of displacement. To put it another way, tastleless nouveaux riches are dreadful, but they’re necessary for a dynamic economy. Such would also strengthen our industrial base, which would make supporting people like the Ukrainians much easier.
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Also: as a practical matter, it is very difficult to maintain the steady, high level of inflation over a long period envisioned in the post. Sooner or later something happens to move the rate up or down, dramatically so in many cases.
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I would say that monopolists don’t want growth in their industries to threaten them but generally they favor overall growth. Bezos doesn’t want any competitors, but you can be sure that he would love to spend less and get more on employee healthcare or live in a world with richer consumers. The shareholders of United Health on the other hand would love to be able to buy and advertise online more cheaply or effectively, but they don’t want transparency for their pharmacy benefits managers. In other words, there are a bunch of different sub-elites who collectively favor the common good but succeed at regulatory capture in their home turf. So I would say that there is a coordination problem, i.e. Congressmen of both parties get bought off to favor special interests over the common good (Presidents less). That’s different than a unified elite front against growth. I would add that there’s a lot of new money across the board especially in Silicon Valley and to a lesser degree across the meritocrats. My guess is that someone like Zuckerberg is culturally all for enriching minorities and for innovation away from his fiefdom. And he’s probably in denial about the ways his ilk are pricing the middle class out of CA.
But you’re right that if enough elites can protect their little rent seeking schemes that it gums up growth more broadly. Populists are right to point out how that is bipartisan. But they hide the fact that they want to replace one elite with another. Sorry if that seems like quibbling, but it really bugs me to hear people like Jared Kushner rail the elites then turn around and raise $2b from the Saudis for a new private equity fund. Bit that’s a sideshow. What we really need is to fix Congress so that it can pass big omnibus reform bills over special interests again. The last one was under Reagan and Dave Stockman and as you may recall, it blew out whole volumes of loopholes in the tax code in order to lower taxes.
Question on growth for an industrialist: what do you think drove the decline of industry especially starting around the 70’s? Some theories hold that factory profits declined because of overproduction here and with Japan/Germany, so capital flowed out into (lower growth) finance. Does that fit with your experience?
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The whole business of eschewing growth started in the 1960’s and is embedded in the mentality of many people who came up in that time and has been passed down the line. I wouldn’t leave out the effect of the government and its regulatory power on the system either. It seems that the upshot of every major attempt at environmental improvement involves a lowering of the standard of living, which in turn involves stunting growth. The classic example of this is nuclear power: disliked at the start for its ability to supply cheap energy (growth,) even with the business of greenhouse gases and nuclear power’s lack of emissions of same have made changing people’s mind on this subject an uphill battle.
As you note, we have a very corrupt political system which has contributed to our inability to effectively solve our problems.
As far as the deindustrialisation of our economy, there are many reasons for this. For starters, how we became the world’s economic hegemon was due mostly to the fact that our competitors were destroyed in two world wars. That created a sense of complacency and we were caught short when conditions suddenly changed fifty years ago (oil shocks, etc.) Our industry did not respond quickly enough to this; hampering this process was the trend at the time for the formation of conglomerates where many operations were wrecked/disbanded in the acquisition process. We were also under assault from the legal/regulatory process through the tort system and the environmental regulation (which, in the early days, was very harsh, before cooler heads and more detailed research made sensible and effective solutions possible.) We also lacked any kind of export promotion policy of our government (as opposed to Japan and European countries,) and international trade was becoming more important. We also had a government which was disinterested in energy development of any kind. Coupled with the nuclear power allergy, we became a net energy importer, subject to the vagaries of Middle Eastern politics. Had we stayed a net energy exporter, we might well have avoided both Gulf wars, 9/11 and the fiasco in Afghanistan.
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Interesting. Thanks.
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