Our National Debt Denial

Read:  https://www.nationalreview.com/2020/12/our-national-debt-denial/

At some point, bond investors see the end coming, as they did for Greece. If they lend at all, they demand sharply higher interest rates. But if rates rise only to 5 percent, our current $20 trillion debt means an additional $1 trillion deficit. Larger debt makes it worse. Higher interest costs rates feed a deficit which feeds higher rates in a classic “doom loop.” The Fed is powerless to hold rates down, even if it is willing to buy $10 trillion bonds, since people demand the same high rates to hold the Fed’s money. And the Fed cannot end the crisis by raising rates, which only raises interest costs further. The end must come in sharp and sudden inflation or default. And that is a catastrophe. When Washington can no longer borrow, our normal crisis-mitigation policies disappear — the flood of debt relief, bailout, and stimulus that everyone expects — together with our capacity for military or public-health spending to meet the roots of the crisis.  Yes, the U.S. prints its own money and Greece does not. But that fact only means that a crisis may end in sharp inflation rather than chaotic default. And it is not obvious that the U.S. government will choose inflation over default.   

Is not the dollar a “reserve currency,” which foreigners are delighted to hold? Yes, but as with all currencies, foreigners will only hold dollar debt in finite quantity and only so long as they perceive U.S. debt to be super-safe. The opportunity does not scale, and trust, once in doubt, vanishes quickly.