There Is No Looming U.S. Debt Crisis
There Is No Looming U.S. Debt Crisis
Karl W. Smith Bloomberg April 23, 2020
(Bloomberg Opinion) -- As concern mounts about the rising levels of U.S. government debt, it’s important to keep in mind two principles that are not quite opposing but not quite complementary: First, there is no looming debt crisis. Second, the U.S. needs to address the growing federal deficit over the medium term in a deliberate way.
To be clear, the pandemic has created an unprecedented shock, and the economic outlook is difficult at best. If there are Depression-like levels of unemployment for an extended period, then it would be a profound economic crisis and public debt will explode. That’s very different from saying that public debt will cause an economic crisis. There are a number of reasons to think that it will not.
First, for nations that issue debt in their own currency, excessive levels of public borrowing tend to produce exchange-rate crises rather than debt crises. The reason for this is straightforward: If debt service becomes unmanageable through taxation, the country can always print more currency to meet its obligations.
This is not the same as saying, as some advocates of Modern Monetary Theory do, that a country with its own currency can always pay for any spending by printing money. Instead, it is to suggest that countries experience the negative effects of excessive debt in different ways — depending on how that debt is financed.
Many developing nations borrow in dollars, for example, and countries that borrow in a foreign currency can be forced to default on that debt if they cannot raise enough revenue to purchase the needed dollars in foreign-exchange markets.
Countries that borrow in their own currency do not face this risk. They do, however, face the risk that printing too much money will cause the value of their currency to fall sharply relative to their trading partners.
These kind of exchange-rate crises were common in Europe before the adoption of the euro. They remain unlikely for the U.S. That’s because, especially in times of uncertainty, there is rising global demand for dollars and dollar-denominated debt. That demand, in turn, is driven by the unique role the U.S. and the dollar play in international finance.
To continue reading, please go to the original article here:
https://finance.yahoo.com/news/no-looming-u-debt-crisis-100012529.html
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