Megan says it is 80% of GDP (kind of). Her mental models of understanding sovereign debt dynamics however, are wrong, not because she's dumb, but because the standard models we all carry around for this stuff is incorrect.
A country is not like a household, in that it can issue it's own currency and that it can force that currency to be accepted and used because it has the power to tax.
However, a household can replicate this if parents issue scrip in payment for chores, but also demand scrip in exchange for privileges (like allowances, later curfews, etc.) In such a situation, is there a "tipping point" for parental scrip? Is there some ratio after which the parent has just issues too much scrip and now will need to start borrowing scrip from other parents in order to pay it all back?
Of course not. If a parent accidentally over issues scrip, then the children, with excess scrip, will bid up the price for whatever scarce good they want which they can buy in scrip. Back in the real world, this is called inflation, and yes national debt levels can get high enough to trigger inflation.
But inflation is only triggered when the children actually start bidding up prices in scrip. If the children just save the scrip, then there is no inflation. So "excess" scrip is measured not in %s, but in the psychological impact it has in scrip users. You only know when you have "excess" when you start seeing inflation, and kids can decide to spend scrip at any point.
Parents don't need scrip from other parents unless they want to hire other people's children, and those other children want to buy things only available in their parents scrip.
“So assume that there is some sort of tipping point for the US, even if it is not actually 80% of GDP. That raises a question that I haven't seen well-answered: how close should we be willing to get to that crucial point?”
ReplyDeleteI answered the question “well” some time ago, or so I like to think. The answer is thus.
As Megan and all the world knows, any country can get too heavily indebted, in which case it will have to pay an excessive rate of interest. However, THERE IS A DEMAND FOR DEBT - i.e. “safe assets”. So if a country whose debt is in demand issues too little debt, it will pay a substantial NEGATIVE real rate of interest.
The UK, US and Germany have all been paying a negative real rate on their debt recently.
In the latter scenario, such a country is screwing its creditors. And it should aim to continue screwing them. I.e. it should aim to maximise the profit it makes on the whole operation. And that probably means aiming for a small negative real rate of interest.
WRT: "It can force that currency to be accepted and used because it has the power to tax."
ReplyDelete"the children, with excess scrip, will bid up the price for whatever scarce good they want which they can buy in scrip."
the children can also walk away from the game altogether, if the scarce good is not worth all the effort accumulating the scrip for, or they reckon that's where the game is headed. Or the tax for what the parents are providing is again too much to go about earning the scrip for. And bear in mind that some of the children might not even be interested in some of the previldges the parents are offering against the tax demand but have to pay regardless, so also the need to keep them down.
Unless the parents also have the 'power' to hold the kids by their throat, "Thou shalt not leave the game or the household -- jus keep persevering to earn this scrip".
It is indeed difficult to quantify where the tipping point is, and sometimes overissuing can become alright if the economy grows enough e.g. via some benign change in spending-saving attitudes or due to technological revolution or businesses pricing their goods better and reworking compensation structures to emphasize variable, profit-linked payouts, and so on. But to say, it never tips no matter how much scrip is issued, that doesn't seem correct. There is already enough accumulation of claims from the past to confidently create more.
Ohm:
ReplyDeleteAgreed. If the sovereign losses the power to enforce the tax, then it loses the power to have its scrip be accepted.
You can see this in third world countries -- they usually have weak ability to tax, and you see citizens operating in very mixed currency regimes.
I agree it is incorrect to say it never tips. I'm not sure that "tips" is the right metaphor -- the question is whether the two sides balance, and both slide around.
Winter,
ReplyDeleteThe key thing is that Gov's tax enforcement comes after exert and earn at the people's end, even though the tax is announced prior to that exert. So ability to enforce is one thing, but there is no ability with any Gov to force acceptance of the tax rate by the people such that they continue to exert and earn as before. Gotchas to gauge what the people can and will take. Sort of like what people are willing to pay for Gov is similar to what they are willing to pay for mangoes in a store. Force a price that the folks don't digest, and they stop showing up. Each consumer's tipping point, of course, is different.
Part of the third world's weak ability to tax is that the citizenry knows that the Gov is not only wasting the collection on an arrogant, lordly bureaucracy, there is downright siphoning off of the money into private account while not even delivering simple things like road and safe water. So people begin to walk out in a different way - start hiding their income.
...(third W cont'd..) "Improve" the ability to identify income and collect fully, you cld get the explicit walkout - decreased propensity to exert and earn.
ReplyDeleteIt is not always 'tips', it can be like one corn popping after another on a time.tax rate (malpriced Gov).wasteful Gov continuum.