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Three Possible Escapes From Debt |
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Dear Reader, |
The government of the United States was partially inert during its recent 42-day "shutdown." |
It nonetheless heaped an additional $620 billion upon the nation's Himalayan debt pile. |
That pile expands day by inexorable day, month by inexorable month, year by inexorable year… as if ordained by God above. |
Yet is there a way out? |
A certain Joe Sullivan-Bissett has ransacked the historical record. |
He has identified how similarly indebted nations clawed their way out of monstrous debt. |
One method — in this fellow's telling — is by way of "financial repression." |
Financial Repression |
The United States government has undertaken financial repression before — as has the United Kingdom's government: |
After World War II, both the US and the UK emerged with debt-to-GDP ratios well above 100%, with the latter at 250%. Yet over the following decades, those burdens shrank dramatically, and without large fiscal surpluses or deep austerity. The solution was financial repression. |
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Yet what precisely constitutes financial repression? |
Governments and central banks effectively capped interest rates while letting inflation run high. With capital controls in place and a banking system that was required to hold government paper, real interest rates stayed negative for years. Investors earned less than inflation, and debt quietly melted away in real terms. |
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By the mid-1970s, the UK's debt ratio fell to roughly 50% of GDP. Much of that adjustment came not from paying debt down, but from the erosion of its real value. |
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Thus — as with any repressive function — financial repression reduces essentially to government rascality. |
That is, to government's natural inclination. |
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It's a Different World Today |
Yet can the United States government resort to such rascality today, Mr. Sullivan-Bissett? |
Not easily. Financial repression relies on closed capital systems and willing domestic savers, both of which are in short supply today. In open markets with moveable capital, measures such as yield caps or mandated sovereign debt holding would likely require complex regulatory interventions or indirect support from central banks. Such policies would be difficult in a globalised, market-oriented system. |
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It is therefore unlikely the inherent rascality of such a deeply indebted government can manifest itself through financial repression. |
It will not be, of course, through want of effort. |
How else could the United States lighten the iron chains of debt? |
The answer is growth — stupendous and dizzying growth. |
We'll Just Grow Our Way Out of It |
Again, Great Britain offers an example: |
After the Napoleonic Wars, Britain's public debt exceeded 200% of GDP. Over the next half-century, it fell steadily, not through inflation (the gold standard ruled that out) but through real growth and persistent, if modest, budget surpluses. |
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The Industrial Revolution transformed output and tax revenues, while the state held spending flat. The result was a slow but powerful denominator effect: GDP grew faster than the debt stock, even as prices remained stable or fell. |
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Can contemporary economic effervescence rival the Industrial Revolution's economic effervescence? |
The answer is potentially yes — should artificial intelligence rise to its advertising. |
Artificial intelligence is our sole agent of debt salvation: |
Could governments grow themselves out of debt again? That depends on whether today's economy can find an equivalent productivity revolution. Demographics, slower innovation diffusion, and lower investment all weigh against it. Unless of course, AI proves to be the answer… |
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The "Blunt Instrument" of Inflation |
We next arrive at the "blunt instrument" of inflation. |
Inflation washes away the real value of debt. Under inflation, the borrowed dollar is repaid in cents. |
Thus a government sunk so deeply in debt as the United States government — despite its crocodile tear protests notwithstanding — embraces inflation. |
Yet can the United States government truly uncage inflation? Again, Mr. Sullivan-Bissett: |
Using inflation to reduce debt today is less straightforward, given that central banks are independent and focused on keeping inflation close to 2%. The recent post-pandemic inflation spike showed how higher inflation can create economic and social pressures, and how institutions respond to keep it in check. If inflation stays above target for too long, it could affect the credibility of monetary policy. |
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And so the United States government finds itself wedged within a pickle jar. |
It cannot take easily to financial repression. It cannot rely upon galloping growth. It cannot reach for the blunt instrument of aggressive inflation. |
How then can that same government climb out of debt? |
Disease Management |
The likely answer is that the United States government cannot climb out of debt. |
It can simply hope to manage its debt… as a man attempts to manage his allergies… his diabetes… or his gout. |
He realizes a permanent cure is beyond reach. And so he trudges on in symptom management, soldierly and stoically: |
Each historical escape route looks less accessible today… |
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That leaves a muddle-through scenario: persistent deficits, modestly higher inflation tolerance, and debt ratios that stabilise rather than fall… |
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History suggests that when governments can't grow, tax, or inflate their way out, they simply wait it out: relying on time, moderate nominal growth, and the slow erosion of debt through steady, incremental policy. |
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It's not a dramatic ending to this episode, but it may be the most realistic one. |
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At Least It WILL End |
I hazard it is indeed the most realistic ending to this episode — this dismal episode. |
The United States government will simply attempt to "wait it out." |
I suspect I will be lounging upon some celestial cumulus cloud long before the episode ends. |
As will you… your children, your grandchildren, your great-grandchildren… and their great-grandchildren. |
Yet — thank the Lord on high — end it will. |
And for that I am grateful. |
Regards, |
Brian Maher |
for Freedom Financial News |
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