They'll also try buy time with extractive policies vs nominal allies. (and complementary to that, policies to stifle relative growth of allies, to prevent capital flight by US wealth)
Because USA debts are local currency, inflation combined with negative overnight real interest rates is the easy way out. Real interest rates might be 5% while inflation is 10%, for example. This will shrink the real debt burden quickly. Inflation causes income taxes to soar, thus cutting the deficit, so even nominal debt might be reduced. Inflation of 10% means long-term interest rates might be 15%, which will crush the housing and stock bubbles. Resulting negative wealth effect will keep inflation under control. On the other hand, negative real interest rates will cause dollar exchange rate to fall, increasing inflation that way. Bottom line is that middle class Americans will be much poorer: house and stock/bond prices down, cash whittled away by negative interest rates, prices up a lot, wages up a little.
Argentina experience is different from the above because Argentina owes debts in foreign currency, so they cannot inflate all their debt away, only the local debt.
Negative interest rates might cause crypto to form the greatest bubble in human history. Then, after all the suckers have bought in and Trump's cronies have all sold out, Congress passes laws to restrict crypto and burst the bubble. Effect of huge bursting bubble will be extremely deflationary. At that point, situation can "normalize" again, meaning resumption of irresponsible tax cuts and big budget deficits plus low interest rates to reinflate stock and housing markets.
I'm pretty confident about forecasting inflation and negative real interest rates, not so sure about crypto.
The US needs negative real long term interest rates, as that is what will reduce the debt payments on government debt. This was achieved in the post-WW2 period by direct Fed intervention to keep the cost of the war debt manageable. But those were very different times, and such an operation in the present day would lead to a collapse in the US dollar and threaten the very reserve status that keeps US debt and import payments in US$. A foreign US$ bond purchase strike will ensue, forcing widespread monetization or positive real interest rates.
Because of the massive debt overhang and the inflationary nature of the economic structure, low short term rates simply work to steepen the yield curve, as assumptions of future inflation rise. Inflation causes both tax revenues and government expenditures to inflate, especially when many of those expenditures are indexed. Crashing housing and stock markets will crash the economy, reducing tax revenues and increasing government social support payments (e.g. unemployment insurance). That's called stagflation.
The US is in the "I wish I were not here" position, there are no easy remedies. There will not be a deflationary crash as the oligarchs and the economy are way too leveraged, so instead most probably a stagflationary period as workers without much bargaining power get crushed by inflation and higher nominal interest rates. Inflation hedges such as commodities, crypto, precious metals etc. will be the place to be. The stock market will be crushed as in the 1970s. House prices may very well go down in real terms, but not nominal terms. The problem is the exchange rate, which if it crashes will heavily drive domestic inflation given teh dependence on imports. The Fed will need to go full QE and Operation Twist to keep medium and long term interest rates negative. The average person will be financially crushed.
I'll top Krugman with an even more outrageous prediction. USA has a strange system whereby Fed creates paper currency and computer account money/debt (bank reserves and bonds) while Treasury mints coins. Fed created money is authorized by law of 1913 whereas Treasury coinage is authorized in the 1789 Constitution. One way to get around a recalcitrant Fed that insists on positive short term interest rates is for Treasury to mint $100,000 and $1,000,000 "coins" to pay bills, which amounts to monetizing government debt. (Because of the high denominations, these "coins" might actually be computer chips with some sort of security feature to prevent counterfeiting.)
Sorry, I didn't read carefully and missed your initial comment about needing negative LONG-TERM interest rates. I disagree. USA government can simply monetize debt by borrowing short at negative short-term rates. Yes, this crushes the dollar but so what? The whole problem is that foreigners are running trade surpluses with USA because they trust the US dollar as a store of value. Eliminate that trust and trade surpluses with US will disappear. That is, foreigners will eagerly trade dollars for something USA wants to export, because they no longer trust the dollar.
Another way of looking at it is that anyone who wants tariffs should also want a weaker dollar, because they accomplish the same thing. And Trump obviously wants tariffs. Though I'm not sure he would understand this argument I'm making.
Now you might argue that foreign trust in the USA dollar is a valuable asset that USA should not be thrown away for short term political gains. But that's an academic argument. Politicians only care about short-term political gains.
Monetization and negative short term interest rates boost demand and boost nominal asset prices, which both stokes inflation and sucks in more imports. It also supports commodity hoarding as carrying costs are negative in real terms. The dollar then goes down, adding to the inflation. Many of the imports are not available from domestic producers and/or are part of complex NA supply chains.
Domestic production is limited, and in many cases import substitution could take many years or even a decade plus. So the trade deficit does not quickly correct. In the meantime prices go up (and even in the long term because China has a much more efficient manufacturing supply chain). More inflation.
That's a recipe for an inflationary crisis and the loss of the dollar reserve status. And utter financial chaos, especially for the banking sector. Any big jump in long term interest rates could easily trigger full on self-feeding debt deflation. A stagflationary crash.
Yes, monetization will cause high inflation. That's the point.
Any increase in imports for investment spending (exporters and import substitution ramping up) will be offset by the mother of all import decreases caused by strapped household finances, especially among the wealthy. Who owns all that USA debt (besides foreigners)? By definition, only wealthy people own anything. When you wipe out debt (not just USA government debt but also state/local debt and corporate debt) via inflation, you effectively wipe out much of the wealth of the wealthy.
Inflation will not cause a banking crisis because the Fed can just backstop the banks while they quickly earn their way out of their hole through massive spreads between negative real rates on deposits (or Fed overnight loans) and positive rates on loans.
As for dollar reserve status, IF, big IF, USA had used its massive continuous trade deficit to finance building infrastructure and human capital development, then reserve status would have been an asset. Because of oligarch control of USA government, trade deficit instead was allowed to result in deindustrialization, and so reserve status was (and is) liability rather than asset. Destroying dollar reserve status will prevent this from ever happening again, and is thus desirable. Inflating away USA debts owed to foreigners will accomplish the same thing as Keynes Bancor and related proposals. Namely, it will send a powerful message around the world to be very careful about massive debt accumulations unless you have enough military power to force those debts to be repaid. Trade will henceforth either be more balanced, or surpluses will be spent on equity investments in the deficit country rather than debt accumulations.
USA has a plutocracy problem which is weakening the USA. Inflation is far and away the most realistic way of fighting that plutocracy. Because inflation initially hits workers, retirees and charity cases harder than plutocrats (because wages/pensions/welfare rise slower than prices), inflation MUST be accompanied by a guaranteed living wage jobs program until exporter and import substitution industries ramp up. Most of these guaranteed jobs should be in housing construction and infrastructure sectors, as these sectors are not dependent on imports so are unaffected by fall in value of dollar.
Similar plutocracy and housing asset bubble problem exists in Canada as in USA, and solution should be same there: inflate all the debt away, cushion the blow to the non-wealthy by a jobs program, focused on building a huge amount of housing and modern infrastructure.
Argentina can't use inflation because it lacks military power to defend against USA debt collectors: such as CIA financed assassins who will kill anyone trying to repudiate Argentina's foreign debt, outright seizure Argentine grain exports by USA Navy, etc.
The only thing unrealistic about my debt monetization idea is the development state aspect (cushioning blow to non wealthy with jobs program to build housing and infrastructure). That might indeed be beyond Trump. Maybe it will be forced upon him or his successor. Other than debt monetization, how exactly do you propose to combat the plutocracy and asset bubble issue in USA, Canada and elsewhere?
Trick is to balance inflationary and deflationary forces. Crash of stock market and housing bubbles (and crypto bubble later) are very useful as a way of combating inflation. Yes, these crashes crush the import and consumption sides of the economy, but they don't crash the export side, which will do very well as the dollar crashes. USA still has a competitive primary sector (resources) and heavy industries and these sectors can be ramped up. Unfortunately for workers, these sectors are low employment (think lights out 24/7 automated chemical or bulk plastics factories, vast factory farms, etc), so there will be a need for government policies to boost employment. This is where Trump may have difficulty because of ideology blinders. Operation twist is not needed if exporters ramping up production just borrow at the short-term negative real rate.
Trump supposedly likes the idea of strong dollar, booming stock and housing markets, and low inflation, but reality is he can't have these things and at simultaneously have low income taxes, booming investment spending on export sectors, good job market, balanced foreign trade account. He has to choose one path or the other. IMO, the latter path is more politically palatable, even for Trump (or maybe I should write "especially for Trump").
Heavy industries take many years to ramp up, and given the decades of deindustrialization and loss of basic core skills that could take more than a decade. In which primary sectors is the US competitive which could massively ramp up production quickly?
The US would need exchange controls to bide it over and a highly effective and efficient development state, otherwise we just get a very inflationary mess.
To make it worse, the Chinese control many basic inputs which would take a decade plus to replace and they are restricting the exports of those inputs in response to the US tariffs and export controls.
A modern economy is not some frictionless being that can immediately respond to demand signals, many of those responses can take many years and may not even happen at all.
They'll also try buy time with extractive policies vs nominal allies. (and complementary to that, policies to stifle relative growth of allies, to prevent capital flight by US wealth)
"(it’s not a vaccine, its an mRNA therapy no matter how much they lie about it"
Thanks for that. Words have meaning. This little phrase triggered much understanding.
Because USA debts are local currency, inflation combined with negative overnight real interest rates is the easy way out. Real interest rates might be 5% while inflation is 10%, for example. This will shrink the real debt burden quickly. Inflation causes income taxes to soar, thus cutting the deficit, so even nominal debt might be reduced. Inflation of 10% means long-term interest rates might be 15%, which will crush the housing and stock bubbles. Resulting negative wealth effect will keep inflation under control. On the other hand, negative real interest rates will cause dollar exchange rate to fall, increasing inflation that way. Bottom line is that middle class Americans will be much poorer: house and stock/bond prices down, cash whittled away by negative interest rates, prices up a lot, wages up a little.
Argentina experience is different from the above because Argentina owes debts in foreign currency, so they cannot inflate all their debt away, only the local debt.
Negative interest rates might cause crypto to form the greatest bubble in human history. Then, after all the suckers have bought in and Trump's cronies have all sold out, Congress passes laws to restrict crypto and burst the bubble. Effect of huge bursting bubble will be extremely deflationary. At that point, situation can "normalize" again, meaning resumption of irresponsible tax cuts and big budget deficits plus low interest rates to reinflate stock and housing markets.
I'm pretty confident about forecasting inflation and negative real interest rates, not so sure about crypto.
The US needs negative real long term interest rates, as that is what will reduce the debt payments on government debt. This was achieved in the post-WW2 period by direct Fed intervention to keep the cost of the war debt manageable. But those were very different times, and such an operation in the present day would lead to a collapse in the US dollar and threaten the very reserve status that keeps US debt and import payments in US$. A foreign US$ bond purchase strike will ensue, forcing widespread monetization or positive real interest rates.
Because of the massive debt overhang and the inflationary nature of the economic structure, low short term rates simply work to steepen the yield curve, as assumptions of future inflation rise. Inflation causes both tax revenues and government expenditures to inflate, especially when many of those expenditures are indexed. Crashing housing and stock markets will crash the economy, reducing tax revenues and increasing government social support payments (e.g. unemployment insurance). That's called stagflation.
The US is in the "I wish I were not here" position, there are no easy remedies. There will not be a deflationary crash as the oligarchs and the economy are way too leveraged, so instead most probably a stagflationary period as workers without much bargaining power get crushed by inflation and higher nominal interest rates. Inflation hedges such as commodities, crypto, precious metals etc. will be the place to be. The stock market will be crushed as in the 1970s. House prices may very well go down in real terms, but not nominal terms. The problem is the exchange rate, which if it crashes will heavily drive domestic inflation given teh dependence on imports. The Fed will need to go full QE and Operation Twist to keep medium and long term interest rates negative. The average person will be financially crushed.
And one more thing. Since we mentioned Argentina, here is Krugman's prediction.%: https://paulkrugman.substack.com/p/lies-damned-lies-and-trumpflation?utm_source=post-banner&utm_medium=web&utm_campaign=posts-open-in-app&triedRedirect=true
I'll top Krugman with an even more outrageous prediction. USA has a strange system whereby Fed creates paper currency and computer account money/debt (bank reserves and bonds) while Treasury mints coins. Fed created money is authorized by law of 1913 whereas Treasury coinage is authorized in the 1789 Constitution. One way to get around a recalcitrant Fed that insists on positive short term interest rates is for Treasury to mint $100,000 and $1,000,000 "coins" to pay bills, which amounts to monetizing government debt. (Because of the high denominations, these "coins" might actually be computer chips with some sort of security feature to prevent counterfeiting.)
Sorry, I didn't read carefully and missed your initial comment about needing negative LONG-TERM interest rates. I disagree. USA government can simply monetize debt by borrowing short at negative short-term rates. Yes, this crushes the dollar but so what? The whole problem is that foreigners are running trade surpluses with USA because they trust the US dollar as a store of value. Eliminate that trust and trade surpluses with US will disappear. That is, foreigners will eagerly trade dollars for something USA wants to export, because they no longer trust the dollar.
Another way of looking at it is that anyone who wants tariffs should also want a weaker dollar, because they accomplish the same thing. And Trump obviously wants tariffs. Though I'm not sure he would understand this argument I'm making.
Now you might argue that foreign trust in the USA dollar is a valuable asset that USA should not be thrown away for short term political gains. But that's an academic argument. Politicians only care about short-term political gains.
Monetization and negative short term interest rates boost demand and boost nominal asset prices, which both stokes inflation and sucks in more imports. It also supports commodity hoarding as carrying costs are negative in real terms. The dollar then goes down, adding to the inflation. Many of the imports are not available from domestic producers and/or are part of complex NA supply chains.
Domestic production is limited, and in many cases import substitution could take many years or even a decade plus. So the trade deficit does not quickly correct. In the meantime prices go up (and even in the long term because China has a much more efficient manufacturing supply chain). More inflation.
That's a recipe for an inflationary crisis and the loss of the dollar reserve status. And utter financial chaos, especially for the banking sector. Any big jump in long term interest rates could easily trigger full on self-feeding debt deflation. A stagflationary crash.
Yes, monetization will cause high inflation. That's the point.
Any increase in imports for investment spending (exporters and import substitution ramping up) will be offset by the mother of all import decreases caused by strapped household finances, especially among the wealthy. Who owns all that USA debt (besides foreigners)? By definition, only wealthy people own anything. When you wipe out debt (not just USA government debt but also state/local debt and corporate debt) via inflation, you effectively wipe out much of the wealth of the wealthy.
Inflation will not cause a banking crisis because the Fed can just backstop the banks while they quickly earn their way out of their hole through massive spreads between negative real rates on deposits (or Fed overnight loans) and positive rates on loans.
As for dollar reserve status, IF, big IF, USA had used its massive continuous trade deficit to finance building infrastructure and human capital development, then reserve status would have been an asset. Because of oligarch control of USA government, trade deficit instead was allowed to result in deindustrialization, and so reserve status was (and is) liability rather than asset. Destroying dollar reserve status will prevent this from ever happening again, and is thus desirable. Inflating away USA debts owed to foreigners will accomplish the same thing as Keynes Bancor and related proposals. Namely, it will send a powerful message around the world to be very careful about massive debt accumulations unless you have enough military power to force those debts to be repaid. Trade will henceforth either be more balanced, or surpluses will be spent on equity investments in the deficit country rather than debt accumulations.
USA has a plutocracy problem which is weakening the USA. Inflation is far and away the most realistic way of fighting that plutocracy. Because inflation initially hits workers, retirees and charity cases harder than plutocrats (because wages/pensions/welfare rise slower than prices), inflation MUST be accompanied by a guaranteed living wage jobs program until exporter and import substitution industries ramp up. Most of these guaranteed jobs should be in housing construction and infrastructure sectors, as these sectors are not dependent on imports so are unaffected by fall in value of dollar.
Similar plutocracy and housing asset bubble problem exists in Canada as in USA, and solution should be same there: inflate all the debt away, cushion the blow to the non-wealthy by a jobs program, focused on building a huge amount of housing and modern infrastructure.
Argentina can't use inflation because it lacks military power to defend against USA debt collectors: such as CIA financed assassins who will kill anyone trying to repudiate Argentina's foreign debt, outright seizure Argentine grain exports by USA Navy, etc.
The only thing unrealistic about my debt monetization idea is the development state aspect (cushioning blow to non wealthy with jobs program to build housing and infrastructure). That might indeed be beyond Trump. Maybe it will be forced upon him or his successor. Other than debt monetization, how exactly do you propose to combat the plutocracy and asset bubble issue in USA, Canada and elsewhere?
Trick is to balance inflationary and deflationary forces. Crash of stock market and housing bubbles (and crypto bubble later) are very useful as a way of combating inflation. Yes, these crashes crush the import and consumption sides of the economy, but they don't crash the export side, which will do very well as the dollar crashes. USA still has a competitive primary sector (resources) and heavy industries and these sectors can be ramped up. Unfortunately for workers, these sectors are low employment (think lights out 24/7 automated chemical or bulk plastics factories, vast factory farms, etc), so there will be a need for government policies to boost employment. This is where Trump may have difficulty because of ideology blinders. Operation twist is not needed if exporters ramping up production just borrow at the short-term negative real rate.
Trump supposedly likes the idea of strong dollar, booming stock and housing markets, and low inflation, but reality is he can't have these things and at simultaneously have low income taxes, booming investment spending on export sectors, good job market, balanced foreign trade account. He has to choose one path or the other. IMO, the latter path is more politically palatable, even for Trump (or maybe I should write "especially for Trump").
Heavy industries take many years to ramp up, and given the decades of deindustrialization and loss of basic core skills that could take more than a decade. In which primary sectors is the US competitive which could massively ramp up production quickly?
The US would need exchange controls to bide it over and a highly effective and efficient development state, otherwise we just get a very inflationary mess.
To make it worse, the Chinese control many basic inputs which would take a decade plus to replace and they are restricting the exports of those inputs in response to the US tariffs and export controls.
A modern economy is not some frictionless being that can immediately respond to demand signals, many of those responses can take many years and may not even happen at all.
Handy and useful tabulations. Wonder how much of the “complex” exports can be manufactured without tungsten steel.