One thing this article doesn't touch on is the soaring government debt, which is now really quite big: 120%, and IIRC if you add municipal debt, it's more like 140%. That is high. It also seems like much of the recent growth has been fueled by this debt.
It's unclear how this is going to unwind. America can afford, apparently, to run their deficit hot, but not forever and without limit. So at some point they have to start cutting expenditure and paying that debt off. What happens then? Or will they somehow default on it? Or, will they manage to deflate it via growth. But it is a bit of a sword of Damocles hanging over the economy, like ZIRP over VC successes of the 2010s.
The crazy thing is just how much the debt increases in living memory. Under Clinton, it was as low as 60%, which is considered a really low level.
My theory is that other countries' trade is so closely tied to the US Dollar that when the Federal Reserve prints money it's not just diluting the US Dollar but all currencies. The US is effectively taxing the world, to pay for its own spending.
> My theory is that other countries' trade is so closely tied to the US Dollar that when the Federal Reserve prints money it's not just diluting the US Dollar but all currencies. The US is effectively taxing the world, to pay for its own spending.
Yes.
The BRICs economic group has been trying to launch their own currency for a while now. This is one of the reasons for it. Trump has threatened to impose 100% tax on them and on anyone else who ever tries.
Brazil's president Lula certainly wants this. He's been pushing for it for years now. I see it in the news every other day. I suppose it's possible that he's just the fall guy for the machinations of China and Russia. Who knows.
I'm ambivalent about it. Having our own currency is good, even better if it's not backed by USD, best of all if it's backed by precious metals like gold. On the other hand, I hate Lula and everything he represents so much I actually want him to piss Trump off to the point he sanctions the entire Latin American continent until Lula and his fellow communist dictator friends drop to their knees and beg for mercy.
The USD to gold exchange guarantee ended in the early 70s, long after the great depression. And there have been many economic meltdowns since then. The two are not related.
When the economy is backed by something real, credit generally keeps up with the broader economy. It can't expand beyond reserves of real resources. Now that the money is not backed by anything, credit can expand infinitely. Credit generates most of the inflation which is a direct and ever increasing tax on the poor. It has been going on for half a century and shows no sign of stopping. The best part is even the mere attempt to stop it will cause a meltdown since the economy is addicted to credit.
We had metal standards way after the great depression, till 1971. Bretton Woods system made USD an international reserve currency, but its convertibility to gold was guaranteed. In 1971 US gov decided to not guarantee that anymore, because it gave a ridiculous advantage to US. Germany was rhe first county to left Bretton Woods, France sent a battleship to collect gold in exchange for US dollar reserves etc.. and the system collapsed. It's called Nixon shock I think.
So, leaving the international system helped the European economies greatly then. It makes sense some other countries are having the same idea now.
We had currencies backed by gold for hundreds of years before the great depression without anything equivalent happening. The great depression happened soon after US momentary creation was handed over to the private Federal Reserve.
The Panic of 1837 (followed by a five year depression) would like a word. And the panic of 1873 (four year depression), the depression of 1882, the panic of 1893, and the panic of 1907.
> The great depression happened soon after US momentary creation was handed over to the private Federal Reserve
Correlation =/= Causation.
The Great Depression was caused by American overproduction and a lack of domestic buyers who could afford to purchase American goods (sound familiar?). This was back when America was still functionally a developing country.
BRICS will never introduce their own currency anyway, so any threats by Trump are moot. Can you imagine India and China actually agreeing on a new currency structure? Lol, it's a total fantasy.
I can certainly imagine China creating their own and making the others use it. I can also imagine Brazil trying, though I can't imagine it succeeding.
Brazil has gone through numerous currencies. They have all gone to zero due to hyperinflation. One of the top Brazil stories on HN is about the way the government conned the population into believing that this time it was going to be different. We are also about to launch our very own central bank digital currency.
It's a little more complicated than that. US inflation is actually good for emerging economies which borrow in dollars, because it eases their debt burden.
US inflation is even better for the US economy which borrow in todays dollars and repays in future diluted dollars which it earns in dollars.
Foreign entites tend to earn in foreign currency, although not always and which is why China for example recyles a lot of the US dollars they recieve back into US government bonds. However the whole thing opens foreign governments and entities up to the risk that the relative inflation rates will affect the currencies (which it does).
> So at some point they have to start cutting expenditure and paying that debt off.
They don't have to cut expenditures at all. Since the Fed controls rates, they can manage the debt by adjusting interest rates. There's nothing preventing them from driving interest rates below 0% and being paid to accept money. And the Fed can buy T-Bonds at below market rates and slowly destroy excess money in the economy in a controlled fashion.
Something to keep in mind is that US government debt is integral to the economy. It's a stable way for entities hold US dollars as cash, and it's the only mechanism for them to hold large sums of US dollars in cash.
It's fine (and expected) for US government debt to continue to increase forever, it's just a number in a spreadsheet. The only real risk is the potential for a default. But even then, if you have $4 trillion dollars, what are you going to do with it instead of buying t-bonds? Exchange it for Euros and risk the impacts of currency fluctuation? And what will the buyers do with those dollars? At some point, someone is going to want to bank those dollars in savings, and that means buying t-bonds (directly, or indirectly), and the risk of default merely becomes a factor in an equation for the holder.
You can do all this at an accounting level. But ultimately US government is buying things with debt, ie paying for goods and services from third parties with an IOU, and can only do it if people think they are getting a good deal.
The way you get shafted with debt is inflation. Barely a few years ago bond yields were around 0. If you lent money to the government then, you're already very behind because of inflation - you're not getting any interest, and by the time you are repaid, the money is worth far less than before.
Furthermore, the Fed can't really let interest rates diverge too much from inflation, since the mismatch drives inflation further. That's why the rates are around 4% now, even as the economy is slowing. They have to be up to contain inflation.
So then, as the election was playing out, you could see bond yields fluctuating in line with inflation expectation. Whenever Trump said something that sounded inflationary, like tarrifs, bond yields jumped up. That's not the Fed doing it, that's lenders demanding more interest from the US govt.
Now I agree the US can get away with this more than other places. They aren't far off Italian levels now, and that would be considered teetering around crisis levels. But it's fantasy to conclude the US can keep magicking money every year with no consequence.
The US administration of the next four years has no intention of making a principal payment on the debt. They borrowed $7 trillion before, they can do it again. If a country dumps their US treasury bonds, the administration will impose tariffs on them.
I think it's interesting to compare other countries. 120 years ago the UK was the most powerful empire in history. Now 36% of UK children live in poverty, and 43% of single parent families and families with three or more children live in poverty. Over 40% of UK families from Asia/Caribbean live in deep, persistent poverty.
Many in the US are really close to that, and describe it as a "poor economy". They may have an iPhone, but they can't afford it.
As long has the US has military supremacy it won’t unwind because the military backs the dollar. As soon as that is gone then it’s all one big free fall.
You lend someone money based on whether you think they can pay you back. People still buy US debt because the US is good with its promises.
It’s the same reason the US dollar is the reserve currency… the US govt knows how to keep it reasonably stable and has decades of success at it.
Does the US use this to their advantage? Sure. But it doesn’t matter… you just need to be better than the next guy. Just observe the 100 year history of many countries: their institutions 100 years ago are much different from today. No one likes uncertainty.
the last time debt was this high was WW2, after it millions of working age men came back contributing to the economy. today the opposite is true, millions of people are exiting the workforce to retire, draining resources like Social Security. It's not sustainable, but US can tap into immigration policy to kick the ball down the road for decades
I find this part funny to because in Canada we want to have it both ways. We endlessly compare ourselves to the USA and wring our hands about whether our taxes are too high or our productivity isn't good enough, because we can't match what the USA has, but at the same time we also wring our hands about deficit and debt and are incredibly hawkish compared to everyone else.
You can't have it both ways!
Somehow it is never raised that the USA is doing absolutely incredible amounts of deficit spending that Canada dares not match, not even under this relatively more inclined to deficit spend current government.
Never raised that maybe some of their good metrics stems from the incredible amounts of deficit spending that is verboten.
US will unwind like all declining empires in history have. The rich will move their wealth out of the currency while the currency is debased via inflation (the debt will be "monetized" in contemptory econspeak). It's already happening.
the largest expediture of the US government now is fake interest payments on fake debt then? or we pay that with fake money fake Americans pay with fake taxes? :)
Yes, it’s literally fake. Japan issues government bonds and instructs the central bank to purchase them and uses that to fund its spending. It has been doing that for decades. Any other country could do the same thing.
It's unclear how this is going to unwind. America can afford, apparently, to run their deficit hot, but not forever and without limit. So at some point they have to start cutting expenditure and paying that debt off. What happens then? Or will they somehow default on it? Or, will they manage to deflate it via growth. But it is a bit of a sword of Damocles hanging over the economy, like ZIRP over VC successes of the 2010s.
The crazy thing is just how much the debt increases in living memory. Under Clinton, it was as low as 60%, which is considered a really low level.