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21-02-2018, 12:43 PM
Up to a point, the US can sustain a very large deficit.
The large deficit, when held by foreigners, is simply a IOU for services in USD priced in nominal dollars. As long as the holders of the debt do not demand actual goods and services but just recycle the nominal money, then there's no problem. To get to a large debt, you either need to print money or deny money supply to the domestic population - guess which approach is true?
So the potentially negative issues are:
1. Asset inflation. Despite the US stock market hitting highs, I see not a big sign of that in asset markets. This is a sign that people are just recycling capital over and over without using it to buy assets.
2. what happens when a big holder of US debt decides to damage US interests by selling the debt (of course it damages themselves as well) possibly for political, not necessarily economic reasons. The US Dollar weakens, bringing down the value of those IOUs, inflating US import bills.
The large deficit, when held by foreigners, is simply a IOU for services in USD priced in nominal dollars. As long as the holders of the debt do not demand actual goods and services but just recycle the nominal money, then there's no problem. To get to a large debt, you either need to print money or deny money supply to the domestic population - guess which approach is true?
So the potentially negative issues are:
1. Asset inflation. Despite the US stock market hitting highs, I see not a big sign of that in asset markets. This is a sign that people are just recycling capital over and over without using it to buy assets.
2. what happens when a big holder of US debt decides to damage US interests by selling the debt (of course it damages themselves as well) possibly for political, not necessarily economic reasons. The US Dollar weakens, bringing down the value of those IOUs, inflating US import bills.