theymos
Administrator
Legendary
Offline
Activity: 5306
Merit: 13218
|
![](https://bitcointalk.org/Themes/custom1/images/post/xx.gif) |
February 08, 2022, 11:34:05 PM |
|
What matters economically is the deficit; the total level of debt doesn't matter much except insofar as the interest payments on the debt affect the deficit.
The main issue with the deficit is that it can cause inflation and/or slow growth (but doesn't always). The huge amount of spending and Fed QE in 2020 and 2021 is one of the main causes of the current high level of inflation, but over the next several years, I don't think that the debt/deficit will be a big issue unless we get more 2020-style spending+QE (which I don't expect soon, at least).
The biggest driver of inflation is when the Treasury runs a deficit and the Fed buys its bonds. From October 2019 to September 2021, the Treasury had a total deficit of $5.9 trillion, and the Fed bought about $3.3 trillion in bonds, so that's $3.3 trillion of pure money-printing. That's extremely inflationary.
From October 2021 to December 2021, the Treasury had a total deficit of $380 billion, and the Fed bought about $221 trillion in bonds. If you multiply by 8 to straightforwardly compare it to the $5.9/$3.3 trillion numbers in the above paragraph, you get a $3.0 trillion deficit funded by $1.8 trillion in money-printing, which is already a reduction. But in reality this is still far too high because spending will go down due to the expiration of certain pandemic-era programs, and the Fed is widely expected to stop buying any more Treasuries staring in mid-March.
Before 2020, the Fed was drawing down its balance sheet, which was actually "destroying" dollars. Soon, maybe as soon as March, the Fed is expected to start doing this again. We'll go from $3.3 trillion in money printed over 2 years to money being destroyed rather than printed. We're moving into an environment somewhat similar to 2019, not a continuation of 2020/2021.
There are other sources of monetary inflation, but they are much smaller in effect than the above-discussed monetization of government debt. For example, in the same October 2019 to September 2021 period as above, lending by private banks created $535 billion. The Fed's open market operations which it uses to set short-term rates, such as reverse repos, can also create money, but I believe that the effect of this on monetary inflation is minor.
There is also not a one-to-one link between monetary inflation and price inflation. For example, it is much more inflationary for the government to send checks to people who will immediately spend it on things than for the Fed's open market operations to enable money market funds to pay rich people more interest on their deposits. And idiosyncratic supply or demand issues can also have effects. But I believe that monetary inflation is the biggest factor in price inflation, especially when you look at longer periods of time.
QE without government spending or increased bank lending does not actually inject money into the economy in any effective way, which is why the QE after 2008 didn't cause inflation. Government deficits without Fed monetization is likely to actually be deflationary, since more and more private money will be sucked up into bonds and used on worthless government waste instead of being used by people to buy things. (Certain types of government spending could be inflationary without Fed monetization. Increasing the debt to send people checks would probably be inflationary, since this would be a transfer of dollars from people who just have their money sitting around to people who are going to use the dollars to buy things. But I think that most government spending will not be efficient enough to have this effect.)
Over the next several years, I expect us to go from an extraordinarily easy-money environment where $3+ trillion was printed, to a tight-money environment where the Fed is on net destroying money. The government deficit will probably go down from 2020/2021 levels toward levels more similar to 2019 because Congress won't be able to pass much, and even if it continues at elevated levels, this will probably make money even more tight. It will take a while for that $3+ trillion of money-printing to completely work its way through the system, but at some point over the next year or two I expect to see <2% in the CPI if things continue on the current track. The shift from extremely-easy money to somewhat-tight money has been and will continue to be very jarring to asset prices; if the Fed gets spooked by crashing asset prices and starts buying treasuries again, then that could change things, though it depends on the details.
Longer term, it's politically impossible for the debt situation to be resolved in any way but money-printing. There's a huge gap between spending and tax revenue, this gap is only getting wider, and literally nobody in Congress is serious about fixing this. Anyone who seriously tried to fix it would be voted out of office immediately. At some point, the debt/deficit will get large enough to create an obvious death spiral of increasing interest payments, the market will want to bring interest rates up to a level that would accelerate this even more, and at this point the Fed will be forced to artificially keep rates low and/or buy bonds. This will cause 4+% inflation for many years, until the inflation fixes the deficit situation. It could also cause the end of the dollar as the world reserve currency. But I don't think that the deficit is large enough to cause this soon. My guess is that the deficit would have to be in the 130-150% of GDP range (around the same as 2020/2021) and continue increasing for several years. The current inflation was caused by a one-time huge increase in both government spending and money-printing, but this is in the rear-view mirror, and the big deficit cliff is quite a bit further ahead.
|