>There's the risk of this system stop working and that's when the US might have hard times due to being forced to live by its means and have no ability to kickstart its own production when that time comes.
I think the risk is greater than that. A concern is not just a regression to the mean, but indebtedness and the future having to pay up for the spending of the past.
I think a different analogy would be a joint credit card where someone can run up the bill and then die. Like national debt, you can always default, but it will be the survivor that takes the hit, not the dead person that spent their life in luxury.
The trade deficit isn't necessarily a problem, but national debt is. It would be one thing if this money was being invested in growth, but it largely isn't. Most of it funds non-growth consumption.
This is largely a self-made internal problem around governmental prioritization and balancing revenue with expenditure. That isn't to say other countries don't also benefit.
The US is trading future prosperity for consumption today. Investing countries are trading consumption today for future prosperity.
> but indebtedness and the future having to pay up for the spending of the past
The debt is denominated USD, the US mint could hypothetically print a trillion dollar note and settle the debts. Doing so would wreck trust in the existing system - so it's not just about the debt, but people tend to gloss over how much control the US has over the debt, so the indebtedness (in USD) is a relatively small factor overall.
> Doing so would wreck trust in the existing system
It would cause immediate hyperinflation. Those notes would go to bondholders who would use it to buy things because holding billions in cash printed by a defaulter isn’t anyone’s cup of tea. So anyone willing to take even absurd amounts of dollars for non-dollar assets is offered absurd amounts. Which means those who didn’t get the helicopter drop find their currency, savings and wages worthless in real terms.
As suspected, “the Fed held an auction for US Bonds and no one showed up, so the Fed bought it all” is crap. The Treasury held an auction. It was weak but didn’t fail. The Fed, as required by law, did not participate in the auction.
While there are similarities, I think it's still very different. Default by itself doesn't make the debt disappear, you just stop serving it for a while. Then you may negotiate some cuts with creditors in exchange for a promise to repay the rest but there's no way they just forgive 100% of it, this makes no economic sense. If you want to get out of the debt completely you need not only a default but bankruptcy and dissolution which is rather painful at the state level. An example would be the Russian revolution and civil war where among other things the Bolsheviks refused to recognize tsar's debts claiming it's a new state now.
The US has done this before, more than a few times. In fact, de-globalisation can be traced directly to the GFC, where the US did indeed print billions to bail out US banks and auto, then getting Japan and China to step up and buy UST to recapitalise the economy. PBoC in 2013 said 'no more' and launched BRI
Do you understand what $100T printed overnight would cause to the economy? The price of everything starting from assets would skyrocket and in a few months we could be living in hyper inflation.
Yes, but it's a temporary turbulence that lasts for a few years, then you can rebound. The debt on the other hand can last for decades taxing the economy more and more. If the cost of servicing the debt crosses a certain threshold there can be no rebound, not without a default.
Effectively when printing money you reset both the debt and the savings. If your debt is much bigger than savings it becomes a good deal.
The US economy still hasn't "rebounded" from the effects of the 2008 recession, forget COVID, even after the bailouts and the offloading of the US debt onto Europe, Japan and China, even though that was in the order of single digit trillions. I don't know where people get the idea that adding a hundred trillion more is where you can cure the deficit. Especially when this time around, you're not going to have EU, China and Japan to baghold for you.
> when printing money you reset both the debt and the savings. If your debt is much bigger than savings it becomes a good deal.
Huh how? When printing money, you make your ability to pay further down the line even more tenuous. I don't know how people can't see the obvious parallels between money-printing and currency-debasing of the Roman times (which led to the economic downfall of that empire).
The only way to cure a deficit while retaining your trustworthiness is to pay it down one way or another.That requires intense taxation for a few years on the rich and corporations alike, and using those proceeds to pay it off. And if possible, to loot someone's gold reserves or something, although that would destroy your trustworthiness on all other fronts and equate you to Nazi Germany.
> The US economy still hasn't "rebounded" from the effects of the 2008 recession
This is a true statement lost on many people who don't remember. The chickens coming home to roost are not from the actions taken during COVID but from the 2008/9 bailout. That's when the whole ZIRP regime started and ran for over a decade. COVID added fuel to that fire but, really, the 2008/9 bailout "kick the can down the road" policy is to blame. We're back to the can and out of road to kick it down.
>.That requires intense taxation for a few years on the rich and corporations alike, and using those proceeds to pay it off.
This is your bias and preference seeping in. Simply put, you need to balance your budget.
The US already has some of the highest corporate taxes in the world. Most countries don't rely on them, and instead focus on the individual pass through profits. most European democracies tax the middle class much more heavily through value-added taxes.
There are so many loopholes in the current tax system. And I say this as someone who benefits massively from the status quo. But like I said, where else can the govt get the cash to "balance the budget"?
And again, European democracies aren't the ideal here when we're talking about balancing the books. Look to the American 1950s and the Clinton Era for better role models.
Nobody can stop the US, they just stop lending under favorable terms, like Argentina.
Nobody wants to make loans to Argentina (or within Argentina) payable in the Argentine Peso. This is the punishment.
The punishment of being credit unworthy is an inability to use credit markets.
This means businesses struggle and the government has its hands tied in dealing with economic crises.
Argentina can't use economic stimulus to correct economic recessions. There is no deep demand for the Argentine peso, so stimulus leads to more inflation rather than increased economic activity
These all seem like side effects of the global reserve currency status. You can't balance the budget until that is given up. Giving up that status would be very painful, so given the choice of pain now or pain later, the current situation seems reasonable to me.
I disagree, it is a consequence of debt outpacing growth.
The key characteristics of a reserve currency are stability and liquidity. If you have these, you don't even need to pay interest.
With properly managed that, being the reserve currency is a win on all fronts. You get to run a deficit because people are happy to trade real products for your paper. People are also willing to loan your paper back to you at more favorable rates. The only downside is if you get drunk and outspend even the inflated demand for your currency. The smart move is to rain in deficit spending if you can't get favorable lending rates.
Blowing up reserve status doesn't help this problem. Then you just have to pay higher and higher interest rates because no one wants your paper anymore
Maybe I'm missing something, but the budget deficit and trade deficit are two separate issues. We can have a budget surplus (as we had under the Clinton administration) while still having a trade deficit.
They are separate but closely connected. Something has to cross the border in the opposite direction. Could be corporate stocks or bonds, could be government bonds.
You can see export of government bonds as the last line of defense where the economy failed to produce enough of other instruments to cover the imbalance.
My understanding is that other countries who end up with those dollars from our trade deficit tend to invest those dollars in US financial institutions: treasuries being one form, but also US stocks and corporate bonds and so on. So the deficit indirectly helps anyone with a 401K, and also allows the government to keep borrowing money.
But the trade deficit is mostly a private sector thing. It doesn't stop the government from raising taxes and cutting spending to achieve a budget surplus and eventually paying down the debt.
I think the risk is greater than that. A concern is not just a regression to the mean, but indebtedness and the future having to pay up for the spending of the past.
I think a different analogy would be a joint credit card where someone can run up the bill and then die. Like national debt, you can always default, but it will be the survivor that takes the hit, not the dead person that spent their life in luxury.
The trade deficit isn't necessarily a problem, but national debt is. It would be one thing if this money was being invested in growth, but it largely isn't. Most of it funds non-growth consumption.
This is largely a self-made internal problem around governmental prioritization and balancing revenue with expenditure. That isn't to say other countries don't also benefit.
The US is trading future prosperity for consumption today. Investing countries are trading consumption today for future prosperity.