Ask the grumpies: Macro 101– why can the US have so much debt?

First Gen American asks:

I don’t get the deficit and printing money in general. Why is the US able to be in such enormous debt and continue to grow it without short term negatives consequences aside from servicing the debt. I just read that something like 70% of foreign countries still use USD as their reserve currency Despite President Obama adding something like 7 trillion to the deficit during his 2 terms and Trump is continuing the spending spree with tax cuts. There are a number of articles in this question and I figured as economics people you may have more of a clue.

At some point it’s not sustainable. Does anyone even know where that cliff is? Does anyone care? Is there a real risk of economic collapse at some point?

The short answer is:  We’re ok so long as enough folks believe we will not renege on our promises.

Longer answer:  We’re ok so long as there’s still decent GDP growth.  We’re better off if that spending is investing in our future and worse off if it’s contributing to widening income inequality.  (This was one reason I loved HRC– she really got that.  Spend on investment.)

Let’s see if I can find a good longer answer somewhere online.  There must be a wikipedia page or something… This investopedia article seems reasonable, laying out all the different arguments.

Basically, some debt is good because it contributes to investment so long as the rest of the world believes in the continued existence of the US as a country (and not one that will refuse to pay).  Too much debt can cause problems.

Here’s a planet money podcast that doesn’t go into too much detail, but is somewhat interesting.

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4 Responses to “Ask the grumpies: Macro 101– why can the US have so much debt?”

  1. rose Says:

    Thank you! That was totally clear and very helpful. I understand so much better now. Your students are really lucky to have you.

  2. becca Says:

    I was just listening the the modern monetary theory planet money podcast. https://www.npr.org/sections/money/2018/09/26/651948323/episode-866-modern-monetary-theory

    It was helpful to listen to, as even I really have trouble viewing things from that angle.

    One thing I was wondering- what percent of countries used the US as reserver currency at different times? Is it even meaningful to posit that there is a “cliff” for debt, or will the systems in place naturally pull investment away from the US as it becomes more risky? To what degree are people investing in the US *because* of military dominance?
    I see so many ideology-driven views on this, and macro is hard to wrap my brain around, I don’t know what to believe.

    • nicoleandmaggie Says:

      I know the US wasn’t a reserve currency prior to WWII. Also the world was on the gold (or modified gold/silver) standard for a really long time (arguably until the 60s/70s– one of The Mouse on X books has an amazing explanation of it in an otherwise extremely funny book), so gold was the reserve currency for much of modern history (which several prominent economics historians argue was the true cause of the great depression– not enough liquidity).

      I don’t know that it’s military dominance so much as perceived stability. I also don’t know if the debt will be a cliff because it will act as a bubble or if investors will gradually pull away. Either one is possible. I don’t think we’ll know until it starts happening and I hope we get through this trump thing so that it doesn’t happen. (It probably also depends on what the alternatives are– China is still too much of a dictatorship for investors to trust that their investments won’t just get taken. Europe is kind of a mess and not necessarily big enough right now. So… who knows!)

      Disclaimer: I am definitely not a macroeconomist.

  3. First Gen American Says:

    I guess it is about as unscientific as I thought. As long as the people with the money still think we are the safest place of the available options, we’ll be ok. Seems nuts but thanks for the concise answer.


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