More Nonsense

I keep reading articles bemoaning the fact that the massive government debt cannot possibly be repaid and will therefore be inflated away. Conveniently forgetting that inflation will drive up interest rates, causing the debt pile to grow.

Since when, in modern times anyway, is government debt ever repaid? It is rolled over and grows more quickly or slowly and may even occasionally shrink slightly, but it is not repaid. The question is not the repayment, but firstly the cost of servicing the debt and secondly the negative impact on the growth of the economy.

Federal debt is currently about 128% of GDP. Thanks to inflation, the Taylor rule currently suggests that Fed funds should be about 18%. At which point interest costs would be 23% of GDP. Federal tax revenues are currently about 14.4% of GDP. Oopsie. Even if you say, well, 7% would be a zero real rate, interest costs would be 9% of GDP, well over half of tax revenue. There’s a reason that the Fed is talking about pitifully small quarter point increases – the government can’t afford any increase at all.

Grow your way out of it so the percent of GDP declines? GLWT. History strongly suggests that debt loads over 80% of GDP strangle growth, as we are about to find out once more, I suspect. Recovery from a major hit doesn’t count, much as Biden would like.

The bottom line is, total debt in the economy must be reduced. Inflation helps, but inflation kills the economy. If the government won’t default, then the private sector must. And it will. That’s what the coming depression is all about.

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