re: Discussion of Fed Liquidity’s Impact on Equity Markets

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Eventually inflation will begin to rise with the massive amounts of spending. One would think anyway.

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It’s tempting to think this, but bear in mind no major developed world central bank has been able to generate inflation in recent times. Japan and Europe, who’ve printed even more than we have, are still in or flirting with deflation. That’s in large part because debt itself is deflationary.

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Putting that interest on what we owe as a federal debt becomes unsustainable. I don’t think the federal debt number as a whole poses the biggest problem, until the ability to start paying the interest on it does. Am I correct?

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Agree. It’s becoming more and more unlikely we will ever be able to repay our debt if rates were to rise significantly.

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If so, this lives big brother a couple options. 1)Begin to raise taxes. This is obvious and plausible but both of these will really be head winds for the economy. 2) the government begins to own shares of publicly traded corporations. This is essence gives them more leverage with their balance sheet as well as controlling “their revenue” while not having to say they raised taxes. I know Japan has done it. So I see us moving more towards a quasi-corporate structure with more government control. Much like the utility sectors now. Any thoughts on this??

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There have been links to resources in this and the “Interesting Links” thread from a) Mackenzie and b) Ray Dalio that discuss what our real options actually are. I tend to agree with them. In the Mackenzie study, they looked back in history at how overly leveraged economies have been able to deleverage and broke it down into four categories:

1) Austerity / Belt-Tightening
2) Hard Default characterized by massive defaults and restructuring
3) Soft Default characterized by high inflation to reduce the real value of the debt
4) Grow your way out, which has typically coincided with a major technological breakthrough or a “peace dividend” on the heels of a successful war (see: WW2).

Of those, 1 is probably the most “just.” It doesn’t penalize savers and retirees with high inflation, and forces people who’ve been over-consuming via debt to tighten their belts and begin under-consuming. But it’s not politically popular in our instant gratification world and doesn’t allow for the “have your cake and eat it, too” scenario of both reducing debt and maintaining GDP. Moreover, it often results in even HIGHER debt to GDP ratios if the slowing growth is more pronounced than the economy’s ability to pay down debt. I still think this will, by force, be the ultimate solution, eventually. 1 and 2 probably aren’t completely distinct; either of the two will likely coincide with some of the other one as well.

3 is what the Fed wants because it’s not as tangible and is more palatable from a political perspective. But few economies have been successful in doing this without a large scale currency collapse, it would be borderline criminal to savers and retirees, and could cause more harm than good in a situation such as our current one where people are struggling to make ends meet to begin with. That, however, won’t stop the shysters from trying anyway.

4 is off the table given previous episodes coincided with technological disruption (electricity, for example) and conflict (WW2) that was absolutely massive relative to anything we’d expect today.

Dalio offers a few other “solutions,” one of which is wealth redistribution (taxing high earners to pay off the debt) and MMT (simply allowing the Fed to monetize the debt and otherwise acting as if it doesn’t exist). Others have suggested things as creative as the Fed buying the Treasury’s gold reserves at a price per ounce that is many multiples higher than the current price. The Treasury would then use the proceeds to pay down the debt.

To me, the answer is staring us in the face just as it is for a family struggling to pay their bills while at the same time paying country club dues, owning multiple boats, and living in a McMansion: Cut. The. Hell. Back.

But good luck finding any modern American politician willing to lead that effort.