We all know that the US is borrowing too much, has been for a long time, and shows no sign of fixing that.
But virtually every major economy is borrowing at unsustainable levels. So if it were just the US, I assume bond markets would punish it, and a lot of money seeking safe haven would go elsewhere- might even jeopardize the Dollar’s status as primary reserve currency.
But what happens if everyone does it? Does it effectively cancel out? Does every nation get punished in the same way? Financial Armageddon? Return to 13% interest rates for everyone forever?
" If every country runs unsustainable deficits, it could lead to a global economic crisis characterized by increased interest rates, reduced investment, potential currency instability, and a heightened risk of sovereign debt defaults, as investors lose confidence in the ability of countries to repay their debts, potentially causing significant economic disruption worldwide."
Well, I don’t know how to show this (and my Googling isn’t helping) but it’s my understanding that governments have been running deficits forever, but not unsustainable ones. And that it’s in the past 20 years or so that they’ve increased from 2-4% to 5-7% in the rich world. And notably, that will be faster than GDP will generally grow in developed nations.
I can’t give a gift link (The Economist only allows one person to read it) but this article certainly seems to show that in its graph
And looking at the link @chappachula provided, the US, UK, France, China, and a number of others seem to be showing ever-growing deficits.
Certainly much ink has been spilled on how, post-financial crisis, deficits just keep growing, even in the good times.
But that’s kind of beside the point. The question “what happens when everyone has crisis levels of debt” should be answerable without having to define what that exact number is.
Much like “How much mortgage/credit card/car loan is too much” will vary by person (ie, someone with no kids who never goes out to eat), but that doesn’t mean there isn’t a crisis level.
A dollar is worth a dollar because everyone agrees that it is worth a dollar. It has no actual value. It’s fiat money.
The government can keep running deficits as long as it wants. If it really needs more money, all it has to do is print some. It just has to be very careful about how much it prints. If it prints too much in a short amount of time, people lose faith in its value, and that alone will cause its value to drop.
The government ran into a crunch during the height of the Covid epidemic, which it dealt with by printing more money. This prevented the economic crisis that Google’s bullshit generator predicts upthread, but it did have some negative effects on the economy as well. Inflation increased and interest rates went up, which caused volatility in U.S. and global markets, for example.
There is a limit to how much money the government can print, but it’s an artificial limit set by current laws and regulations. In 2011, the idea of minting a “trillion dollar coin” was floated around, since coinage is subject to different laws and regulations. The idea is that you fix the shortfall in the budget by simply printing a trillion dollar coin and shoving it into Fort Knox or whatever. Now you have an extra trillion dollars to work with in your budget. Minting such a coin would have some definite negative effects on the economy, so in 2011 the government managed to come to an agreement on the budget that did not involve minting the trillion dollar coin. But the idea of the trillion dollar coin was tossed around again during Covid. Again, they managed to work out a budget without it.
If you play these types of games too much, other governments don’t need to punish you for it. You’ll punish yourself with higher interest rates and an overall devaluation of your currency. At some point your currency becomes so devalued that other governments won’t give you loans. At that point your deficit financing scheme falls apart and the entire economy goes into a huge crash and burn. But we’re not there yet. So far, the economic hits that we take from rising inflation and higher interest rates are enough to reign in our deficit financing and keep it at a level that is sustainable in current worldwide conditions.
As @OldOlds says, markets are self-correcting. Who is buying the debt? Where else can the money go? From @chappachula’s link, the two largest deficits in dollar terms are the U.S. and China, the world’s two largest economies. The markets are currently determining that such debt is sustainable.
That a global depression might emerge from continuing this trend is obviously the worst case scenario. How likely is that? The last true global depression came in the 1930s, from a combination of idiocies but not from unsustainable deficits. We actually were in surplus in 1930, before the big spending started. The global economy is far better today than then.
The country as a whole is awash in money. Berkshire Hathaway is sitting on $325 billion. Apple has $162 billion. The S&P 500 has a total of $2.6 trillion. They can’t find places to spend it. This is not a signal of financial crisis. The cause of modern deficits is not from excessive government spending - spending has receded since the pandemic - but refusal to raise taxes to historic levels.
The rightward tilt of most western electorates means that lowering taxes will continue and deficits will rise for the foreseeable future. Beyond that is anyone’s guess.
The crisis point is default: when holders of government bonds ask for their interest payments or their matured payoff, and the government either says it just can’t do it or else pays off in devalued toilet paper with 0.1% of the buying power the bond holders had expected.
I’m not sure when the last time was that a major government went into flat-out default– the Hapsburg Dynasty in the seventeenth century?– but in modern times hyperinflation has practically amounted to the same thing.
Sorta sidebar, but what is Trumps position (if any) on the US Debt Ceiling?
We get the regular game of high stakes chicken on this monetary issue as the radical right seems inclined to default as a mechanism for reining in spending, (but the debt ceiling being about paying for debt already incurred)).
But a real estate mogul isn’t particularly fazed by debt, right? So long as the payment schedule to service can be renegotiated?
It will be a rather cold shower of awakening stateside if/when the USD loses it’s reserve currency status and the US can’t just print money but actually need to pay for the now non-USD denominated debt.
Trump’s stated position is that he favors reducing the debt. However, during his last presidency, he increased the U.S. debt from about 20 trillion dollars to about 28 trillion dollars (which isn’t much of a reduction by the way I do math, kinda the opposite). To be fair, about half of that increase was due to Covid.
The debt ceiling has been suspended on more than one occasion. I suspect it will get suspended again during Trump’s second term.
Hopefully. There is however a faction within the Republican party that wants to force a default and crash the economy, as an excuse the tear down the parts of the government they don’t like. And Trump is an idiot.