The implications of the United States' "unsustainable debt trajectory"

[Atheros]

A research paper titled Crunch Time: Fiscal Crises and the Role of Monetary Policy came out last week which is summarized reasonably well by a CNN article. The message is similar to that in a book I am reading that argues that the US Debt and Dollar are both overvalued and set to pop.

So here is my observation. Do share your thoughts.
The US debt is currently ~$16 trillion and it is growing by $1 trillion annually.

One of these three things will happen.

• A. Politicians in the US will start working together in the coming years and will significantly raise taxes and reduce spending on Medicare, Medicaid, and defense in order to turn the 1 trillion dollar deficit into a 500 billion dollar surplus and pay down the debt over the next 40 years. They do this without the support of the electorate. As an example, if taxes aren't raised, this would require reducing spending from 3.5 trillion per year to 2 trillion, a 43% drop. The situation in the coming years only gets worse as health costs climb.
• B. The government defaults
• C. The FED monetizes the debt causing vast inflation

I have trouble envisioning A happening. I have trouble imagining a public tolerating something like 10% tax increases and 30% spending cuts at the same time. The public has grown used to deficit spending and will demand that politicians continue on our path. The obvious problem is that there will inevitably come a time when investors will not be willing to lend the government more money, which will cause interest rates to rise, which will cause investors to flee US investments which will cause severe dollar inflation.

The US is increasingly borrowing to pay back debt. This is a ponzi scheme. I suspect that investors in US debt understand this. The situation reminds me strongly of Pirate's ponzi scheme from months ago: may people wondered openly how he could have raised so much money despite the thing so clearly being a ponzi scheme but the answer eventually became obvious: many of the investors understood that it was a ponzi scheme and were playing anyway hoping to pull out before everyone else and come out unscathed. Right when Pirate showed the first signs of straining (lowered interest payments) people wanted their money back en-mass and that was the end. I believe that the same mentality might be in effect today with US debt: once the thing shows signs of straining, interest rates start to rise, people will try to sell the debt and it will resemble a popped bubble. The US won't be able to (or won't want to) continue with the interest payments and either B or C above will happen.

Thoughts?

[notig]

C i am guessing

But I'm wondering if there is a point where they can't do that anymore?

if our income taxes go to pay interest on the public debt... and the public debt is increasing.. at what point does our income tax become not enough to pay it? and when that happens do taxes go up or does something else happen besides default?

[Etlase2]

You have a big misunderstanding of how the US monetary system works.

Option B won't happen because the Fed isn't some independently operated private bank, it is a private bank run by the federal government. A stupid distinction from a public central bank, but a necessary one due to the constitution. Option C is what already happens on a regular basis.

Politicians do not need to do diddly squat about addressing the national debt. The more they spend the more resources of the economy are diverted towards the government's interest. Whether or not people are willing to put up with what the government thinks is the best way to shape society is a political problem, not a monetary one.

You can be sure that the government and the fed will do what it takes to keep the money system running smoothly--so this sky is falling shit is getting silly. The CNN article you linked aptly points out that all this is is a PR problem, there is no danger of anything relevant happening.

It's not a ponzi scheme, it's a monetary scheme, but thanks for reminding us about Pirate because that would have been obscure otherwise.

[Etlase2]

The Fed is not a govt bank or controlled by the govt.

Please It does exactly what the federal government needs it to do--it most certainly will not allow for a default. The general policy decisions may be up to vote, but do not mistake this for being independent of the federal government. It is not and was never intended to be.

[odolvlobo]

My speculation is that the result will be B and C, but neither will be intentional. The problem is that both inflation and rising interest rates are inevitable. The rise in rates will cause the value of the Fed's assets to plummet, and it won't be able to reduce the money supply and reduce inflation. Furthermore, even if inflation reduces the debt burden, rising interest rates will require new debt at rates that the U.S. won't be able pay. So, my prediction is inflation followed by default.

[Etlase2]

you really need to read more on the topic. if anything the bank controls the govt.

No, it does not. That is a laughable presumption; congress can abolish the fed whenever it so chooses.

[notig]

you really need to read more on the topic. if anything the bank controls the govt.

No, it does not. That is a laughable presumption; congress can abolish the fed whenever it so chooses.

Of course. Congress can also choose to become honest and not corrupt anytime they want as well.

/s

[Etlase2]

Abolishing the fed would not be a default. Read more on how the fed interacts with the treasury--the government can not default to the fed. The debt owned by the fed is just a matter of account, it is of no actual consequence. This information tends to get lost in the sensationalization of the federal reserve system.

[inge]

My personal point of view as European citizen:

For A: Europe is trying at the moment a kind of similar policy. Almost all countries raise their taxes doe to reduce their government debt. Will it work? We will see. At the moment Ireland is recovering from a couple of years of austerity and Irish credit rating has been upgraded a couple of days ago….

For B: default? Do you mean US defaulting just like Argentina? For me as European would be the end of the world as I know it…Don’t believe it.

For C: well US doesn’t look like being afraid of inflation. At least not in the same way some european countries would be….so probably the dollar press will be used.

Regards, Inge

[Liquid]

http://www.usdebtclock.org/

[justusranvier]

I expect the USA to follow the same trajectory USSR. At some point the unfunded liabilities will make the continuance of the political system untenable so they will shed those obligations by dissolving it.

A "new" government will be formed to take its place, and to the surprise of no one the same assholes will still be in charge just under a different name. It will probably be less totalitarian though in the same way that Russia is less totalitarian than the USSR because it's more profitable for the rulers that way.

[farfiman]

My speculation is that the result will be B and C, but neither will be intentional. The problem is that both inflation and rising interest rates are inevitable. The rise in rates will cause the value of the Fed's assets to plummet, and it won't be able to reduce the money supply and reduce inflation. Furthermore, even if inflation reduces the debt burden, rising interest rates will require new debt at rates that the U.S. won't be able pay. So, my prediction is inflation followed by default.

Sounds right although the timing of it is what everyone wants to know. They somehow manage to kick the can down the road and maybe can do so for a few more years. Maybe they are hoping for some external excuse ( like an alien invasion..  or WW3  ).

[Severian]

if anything the bank controls the govt.

I'm amazed that more people don't understand this simple fact.

[johnyj]

You have a big misunderstanding of how the US monetary system works.

Option B won't happen because the Fed isn't some independently operated private bank, it is a private bank run by the federal government. A stupid distinction from a public central bank, but a necessary one due to the constitution. Option C is what already happens on a regular basis.

Politicians do not need to do diddly squat about addressing the national debt. The more they spend the more resources of the economy are diverted towards the government's interest. Whether or not people are willing to put up with what the government thinks is the best way to shape society is a political problem, not a monetary one.

You can be sure that the government and the fed will do what it takes to keep the money system running smoothly--so this sky is falling shit is getting silly. The CNN article you linked aptly points out that all this is is a PR problem, there is no danger of anything relevant happening.

It's not a ponzi scheme, it's a monetary scheme, but thanks for reminding us about Pirate because that would have been obscure otherwise.

Totally agreed, C is happening and it won't create inflation since the money has already been spent, new money just improved the account outlook. But unless they write off some of that government debt (through which way?), the system is still in danger because of higher and higher interest

And there are still problems from outside that can not be identified easily, a large part of the US debt is owned by foreigners

[BitcoinAshley]

Re: The Fed; it is pointless to argue whether the Fed controls the government or the government controls the Fed; it is a matter of perspective.

Congress passes a budget with a severe deficit, but congress doesn't want to raise the debt ceiling and tend to drag their feet quite a bit, even risking credit downgrades and such. The Fed's hands are tied, so they print money. You can either spend less, raise the debt ceiling, or print money. Note that I am not in any way supporting or condoning the Fed's or congress's actions.

Now as for "what they are"
I hear people say "Lol they are a Private Institution!"
And then "Lol no they are totally Controlled By The Government!"
"You are wrong, bro"
"No, YOU are wrong!"

How about "They are a private institution given monopoly powers by the federal government."
You can't just say "they are a private institution" and leave it at that. It's like calling a private prison a private prison and leaving out the convenient socialist fact that 90% capacity is contractually guaranteed by the state. When the state uses its magical statey powers to give a "private institution" powers that, say, help eliminate its competition, you're really not being accurate if you call it a private institution. On the other hand, if an institution (like the Fed or private prisons) is privately owned but is given "special mutant powers" by the government, you can't really say "it's a government institution" because it's not, t e c h n i c a l l y.

SOOO that is why we have the prefix "quasi." I prefer to call the Fed a quasi-private institution just as Bitcoin is a quasi-commodity (has some features of fiat and some of commodity) and private prisons, at least in the way they are usually implemented in the U.S. of FUDmerica, are quasi-private. I would prefer to use the word socialism, but socialists get all upset that I call it what it is. Hey if it steps like a goose, and gives magic quacks to 'private' institutions, it's not a free-market-capitalist-destroying-the-world-with-evil-CEOs-and-profits-at-all-costs duck.

Calling the Fed a private institution is like calling a teenage mutant ninja turtle a regular old human boy.
Calling it a government institution is like calling a ninja turtle a common snapping turtle. For reference:

[nebulus]

God, I used to love ninja turtles... Now, the real question is... Are they teenagers in turtle or human years?

[BitcoinAshley]

God, I used to love ninja turtles... Now, the real question is... Are they teenagers in turtle or human years?

 
I guess that's where the analogy gets complicated

[meowmeowbrowncow]

Re: The Fed; it is pointless to argue whether the Fed controls the government or the government controls the Fed; it is a matter of perspective.

Congress passes a budget with a severe deficit, but congress doesn't want to raise the debt ceiling and tend to drag their feet quite a bit, even risking credit downgrades and such. The Fed's hands are tied, so they print money. You can either spend less, raise the debt ceiling, or print money. Note that I am not in any way supporting or condoning the Fed's or congress's actions.

Now as for "what they are"
I hear people say "Lol they are a Private Institution!"
And then "Lol no they are totally Controlled By The Government!"
"You are wrong, bro"
"No, YOU are wrong!"

How about "They are a private institution given monopoly powers by the federal government."
You can't just say "they are a private institution" and leave it at that. It's like calling a private prison a private prison and leaving out the convenient socialist fact that 90% capacity is contractually guaranteed by the state. When the state uses its magical statey powers to give a "private institution" powers that, say, help eliminate its competition, you're really not being accurate if you call it a private institution. On the other hand, if an institution (like the Fed or private prisons) is privately owned but is given "special mutant powers" by the government, you can't really say "it's a government institution" because it's not, t e c h n i c a l l y.

SOOO that is why we have the prefix "quasi." I prefer to call the Fed a quasi-private institution just as Bitcoin is a quasi-commodity (has some features of fiat and some of commodity) and private prisons, at least in the way they are usually implemented in the U.S. of FUDmerica, are quasi-private. I would prefer to use the word socialism, but socialists get all upset that I call it what it is. Hey if it steps like a goose, and gives magic quacks to 'private' institutions, it's not a free-market-capitalist-destroying-the-world-with-evil-CEOs-and-profits-at-all-costs duck.

Calling the Fed a private institution is like calling a teenage mutant ninja turtle a regular old human boy.
Calling it a government institution is like calling a ninja turtle a common snapping turtle. For reference:

Hence why it's difficult to have practical discussions with ideologues.

[Atheros]

Whether the Fed controls the government or vise versa is not within the intended scope of my post. This question will never be answered here because it isn't even well defined. Please ignore it!

The question is whether I am correct in my observation that the future holds either A, B, or C (or a combination thereof). And then further, what are the signs that things are starting to crack. Currently I am watching for
1) Rising interest rates and dropping bond prices especially when (if!) the Fed ever stops QE4
2) Failed treasury auction

Currently odolvlobo has the most logical and reasonable post.

[Etlase2]

I think you mean odolvlobo has the post that most closely agrees with the agenda you want to promote in this thread--that being stupid shit like risk of US default. The US is a sovereign nation with a sovereign currency and cannot default unless it fricken damn well wants to. Otherwise there is absolutely no chance. The crap about the debt ceiling is just the latest political toy that you obviously let the media spoon-feed to you, and with relish, without critically thinking about any of it. Stop being the exact reason why we have such a shitty system in the first place.