"...Suppose we have run our “one time” final expansion and are at 200% debt to GDP ratio.
The next big crisis hits — a war, pandemic, financial mess, or all three.
The US wants to borrow another 20% of GDP, and roll over the outstanding debt.
Markets get worried and demand, say, 5% rates.
That means 10% of GDP more primary deficit, or 10% of GDP more borrowing, 30% of GDP, plus the roll-over.
Moreover, the consequent write-down of asset values leads inevitably to another big Wall Street bailout and asset purchases, all with more borrowed money.
And so on.
When this spirals out of control, you have a debt crisis.
It must lead to sharp inflation, or default.
And there is no Germany to bail us out, no Mario Draghi to “do what it takes.”
Default is not impossible, just because the US and eurozone print our own currencies.
...It won’t be a simple default.
...T bills may get forcibly rolled over to low-coupon long term debt for example.
But this would be a financial and economic catastrophe.
“Riskless” US debt and the US ability to bail out any financial institution in trouble are at the heart of our current financial system.
...No, financial markets do not see this coming.
But financial markets never see it coming...Read all.
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