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- 🔔 US debt ceiling: Could the government default?
🔔 US debt ceiling: Could the government default?
The US government is at risk of defaulting and going bankrupt or something.
Scary times.
Got gold? Got Bitcoin? Got too much going on in your life to care about this ridiculous pantomime?
Let's start at the obvious place. The US government will not default.
It sounds blasé, but they can literally just 'print' money.
As has been proven time and again, all currency issuers have this privilege.
But how will we pay for this? There's no magic money tree!
And just LOOK at these deficits! 👇
But what's on the other side...?
Your deficit is my surplus.
Put another way, the government borrows, then spends right back into the economy 👇
Oversimplifying, but hopefully you get the idea.
If the government is to 'balance the books', it has to take money out of the private sector via taxation and back into the coffers (and we saw how well austerity worked after the GFC)
But the government doesn't work like a household.
They don't need to make sure they end the month in the black and put some away for a rainy day.
They can just 'print' more by issuing bonds.
Those bonds are then 'sold' to the private sector or central bank and exchanged for currency reserves.
Which the government spends into the private sector etc. etc.
Stephanie Kelton explains 'the deficit myth' in her book, and in this short video 👇
Whether you agree with MMT as an idea or not, the book is well worth a read. There are different ways to think about 'money'.
Back to the debt ceiling. Joe Weisenthal nails it here 👇
This brings us to the debt ceiling, which everyone forgets about until we're reminded every few years of this silly law where Congress has to actively raise the amount of debt that gets authorized (a vote separate from spending) in order to avoid default.
There's a simple way around this problem, and that's for the Treasury to mint a platinum coin (an option clearly spelled out in the law) and use that money to retire (buy back) U.S. federal debt currently being held by the Fed, reducing the total stock and providing breathing room under the debt ceiling.
Of course, making money through the minting of high-denomination coins sounds weird and inflationary. But it only sounds inflationary for the same reason that people thought QE would be inflationary in 2009.
As my colleague Ed Harrison puts it, you can think of the coin as a kind of Treasury QE. It would simply be an asset swap. The Fed is given a coin to hold on its balance sheet. The Treasury gets retired debt back. The effect on the real economy is marginal at best. There's no new spending. No new money chasing goods. Just different arms of the government making accounting changes.
If you understand why QE wasn't inflationary in the wake of the GFC, you understand why the economic significance of the coin would be modest as well.
The idea of minting the trillion dollar coin is nothing new.
It's been around since ~2011 and was discussed here in 2013...
It's unlikely to be minted this time too, because politicians like to use the debt ceiling as leverage (or complain about others doing it when the boot's on the other foot) 👇
Summing up, the debt ceiling is mainly about politics and accounting, which is why markets just don't care.
🔥 F.I.R.E: Financially Independent, Retire Early
Loved this take 👇
What if the "wealth effect" was so successful (boosting equities and crypto) that it's actually depressing labor participation rate and raising reservation wages?— Joseph Wang (@FedGuy12) September 22, 2021
It's probably more complicated, but definitely something worth thinking about.
Even if people haven't made enough to retire, maybe they've built some savings and this is part of the reason that it's harder for companies to find workers.
Then there's your Silicon Valley engineers...
Even removing Bitcoin from the simulation, you're still looking at $2.8 million...
Charts/screenshot via @VincentDeluard
Clearly, this isn't your average person, but the theory is still the same.
The wealth effect can disincentivise working, especially for those who didn't enjoy their previous jobs.
Doesn't matter if it's making money in crypto & memestocks, or using a parents house as a cash machine.
It relieves that pressure to 'just get a job'
Which could explain why the participation rate isn't recovering...
Charting China's Incredible Property Boom
All charts below are cherrypicked from this 2020 paper by Kenneth Rogoff & Yuanchen Yang (& surprisngly light reading for academic research)
We present new and significantly updated data to suggest the real estate sector has an outsized footprint on China’s economy, and that broadly construed, constitutes 29% of China’s economy, even higher than previous estimates. 👇
All good things must come to an end, but what comes next?
