You commonly hear about how we are indebted China or whoever and because of that, they wield power over us.
This isn't loan shark style debt. The US holds all the cards in this case. It's sort of like, the mantra, "if you owe the bank millions of dollars, it's your problem". If you owe them billions, it's their problem.
The US could even pay back that debt with money they themselves issued if needed.
The problem (one of them) with Argentina is that they don't have industry, so simple like that. That's the trap where many countries are stuck.
Because in order to develop an industry you need investments and protection of the new industry until it's able to compete. Investment can't be only in your currency because you need to import things for the new industry. And protection is "discouraged" by those that are already developed (1).
The important thing about external debt is: is the debt denominated in your currency?
Because if you are Argentina (a country with little industry and exports) and you get a debt in Dollars in order to be able to import, of course you can get in the situation where you have to default your debt in a foreign denominated currency.
Are you sure issuing money to pay off debt leads to inflation? Citation needed. I assume you would cite the quantity theory of money [1], which says that "the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply."
Using the quantity theory of money as your model, how do you define the size of the money supply? Do you include or exclude government debt? It is a highly liquid financial asset, so maybe it should be included. Maybe not at par, but at some discount.
If it is included at par, then monetizing the debt (issuing new money and buying debt with it) [2] does not change the money supply. Here's the math: money supply is M + D (money + debt), and you monetize X dollars of debt, then the new money supply is (M + X) + (D - X), which is equal to M + D. Therefore, according to the model, we should not expect inflation.
Note that, in the US in the last 10 years, the Federal Reserve monetized trillions of dollars of debt [3]. Has there been hyperinflation, as you would claim?
I forget where I read it, but I found it convincing, that printing money to pay debt to large investors does not cause significant inflation. The investors will not spend the cash on consumer goods, they will probably just loan it right back to you and the money remains locked up and not circulating in the economy. There ought to be nonzero inflation as a result, but only a tiny fraction as much as if the money were injected at the bottom where people are more likely to spend than save.
The idea that a government with control over its own currency can print money to pay debt without significant inflation is a part of Modern Monetary Theory. Here's a blog post explaining it: http://bilbo.economicoutlook.net/blog/?p=31715
Most (all of them?) episodes of hyperinflation, including the infamous Weimar Republic and Zimbabwe, are not caused by "printing" too much money, but by a fall in the productive capacity of the economy.
That’s misleading. Without creating an ever larger money supply hyper inflation can’t continue. Similarly, hyper inflation requires the state to continue to exist.
For example various currency’s have dropped so their only value is as a novelty item or physical object. But once it hits that point it’s value can’t continue to fall.
In my opinion, it's misleading to insist that the cause of hyperinflation is "printing" money and, never mention, that the real cause is the falling in the productive capacity of the economy.
For instance, the narrative about the Zimbabwe crisis is always the same: The government just went crazy and started to print money.
In my opinion, that's a totally dishonest narrative (and politically motivated maybe?), when what really happened is that they destroyed their main productive activity (agriculture).
>>"Similarly, hyper inflation requires the state to continue to exist."
Well, yes, of course, are you saying that the state stopping to exist would be a better alternative?
The drop in productive capacity is the motive, but not the means; the printing of the money is an action to prop up state finances with the direct effect of causing hyperinflation.
i.e. the Zimbabwe narrative should be: the government tried to dig itself out of a hole by printing money.
Similarly, the German government printed money in the 1920s to try to keep up with reparations payments which were larger than the economy could bear through taxation. (Though of course printing money is effectively a tax on savings, with the added effects of disruption to contracts.) And since the reparations were denominated in hard currency there were diminishing returns, as the government was printing ever-devaluing Papiermarks with which to buy Pounds Sterling and Francs.
The drop in productive capacity of the economy was much smaller than the drop in the value of their currency, so going crazy and destroying agriculture was responsible for the first part of inflation, but staying crazy and printing money was responsible for the most of it.
Taking debt to pay back debt does not automatically lead to hyperinflation. The US federal government currently takes debt every year to pay off debt. That's sustainable so long as these payments stay a relatively small percentage of the total revenue. Unfortunately, as debt to GDP ratio continues to rise, if inflation drives interest rates to rise, things can get messy pretty quickly.
Yeah, that's why you don't want to do it(inflate debt away) but you can if you need to. It's never a bad thing to have a get out of jail free card on standby.
That's different. If the government prints money and spends it on goods and services in the economy to cause inflation, that would be 'inflating the debt away'. On the other hand if they print money solely to pay the debts, and they do not spend it on anything other than paying the debt, then that will not cause much inflation because the investors are most likely going to reinvest the money again, and it will not circulate in the economy. The result may not be much inflation at all.
> The US could even pay back that debt with money they themselves issued if needed
Intergovernmental debt is a geopolitical concern. The U.S. could freeze interest payments and redemptions to China. It could place those holdings in receivership and pass a law granting those oppressed by Beijing damages from it.
With international debt, the debtor holds the cards.
> With international debt, the debtor holds the cards.
I think this sentence needs "if the debtor has equal or superior military capabilities". Some small country owing to the US certainly isn't in the same position.
> Please point to a case where US attacked a defaulting debtor
Gunboat diplomacy [1] features vibrantly in history. "The Venezuelan crisis of 1902–03," for example, "was a naval blockade imposed against Venezuela by the United Kingdom, Germany and Italy from December 1902 to February 1903, after President Cipriano Castro refused to pay foreign debts and damages suffered by European citizens in recent Venezuelan civil wars" [2].
Broadly speaking, the UN provides guidelines--not actual limits--to the anarchy that is geopolitics.
You shouldn't put words into my mouth. A military intervention is always on the table - what pretense you use is a different question. That the US has been very liberal with the pretenses in the recent decades is well documented.
The fact of the matter is that military strength is what -internationally- decides who holds the cards.
Just look at how EU was forced to erase more than 50% of Greece's debt.
Or look at how US hedge funds are still fighting Argentina (in court) to recoup some of the money. According to your logic US should have threatened Argentina by now.
It is also entirely possible that if the US decides to actually make this (say) China's problem by overtly refusing to pay back the debt, everyone else who holds US Treasuries would start dumping them, driving demand lower and lower until both (US and China) the giant economies come crashing down.
That is, this may not a zero sum game. By which I mean, both countries could lose (and also end up taking the entire world economy down with them for at least a while).
You commonly hear about how we are indebted China or whoever and because of that, they wield power over us.
This isn't loan shark style debt. The US holds all the cards in this case. It's sort of like, the mantra, "if you owe the bank millions of dollars, it's your problem". If you owe them billions, it's their problem.
The US could even pay back that debt with money they themselves issued if needed.