> Wouldn't that eventually lead to a 'collapse of rome' type situation?
No.
Intuitively, it seems like piling up mountains of debt would lead to a default (or default equivalent) some day in the future. But if you're a government and your debt is denominated in a currency that you control, you'll always be able to meet your debt obligations by creating new currency.
Now you might think that this kind of "money printing" action would lead to inflation, which is the equivalent of a default that's distributed across the entire economy. This isn't true either.
This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening. Poof goes the distributed default.
The deficit can be way higher than it is now. And it can be permanent. We can cut taxes AND increase spending no problem.
There is, in fact, a limit to how much of this we can do. That is to say, there's no limit to how big the debt can grow, but there is an optimal size of the deficit, above which (and below which) we start to see some problems. But that optimal size has nothing to do with balancing the budget in the traditional sense.
If we don't kick the can down the road sufficiently, we're dropping the ball.
Okay, good faith response here, just trying to wrap my head around it;
>This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening.
So you're saying we print money to meet the demands of bondholders, but stop printing and raise the federal funds rate to combat inflation if it starts to grow past target?
No.
Intuitively, it seems like piling up mountains of debt would lead to a default (or default equivalent) some day in the future. But if you're a government and your debt is denominated in a currency that you control, you'll always be able to meet your debt obligations by creating new currency.
Now you might think that this kind of "money printing" action would lead to inflation, which is the equivalent of a default that's distributed across the entire economy. This isn't true either.
This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening. Poof goes the distributed default.
The deficit can be way higher than it is now. And it can be permanent. We can cut taxes AND increase spending no problem.
There is, in fact, a limit to how much of this we can do. That is to say, there's no limit to how big the debt can grow, but there is an optimal size of the deficit, above which (and below which) we start to see some problems. But that optimal size has nothing to do with balancing the budget in the traditional sense.
If we don't kick the can down the road sufficiently, we're dropping the ball.