[nhaehnle]

Empirically, the case of Japan contradicts your claim that there isn't a whole lot of room to move. To remind you, Japan has long at close to and above a 200% debt-to-GDP ratio without any financing difficulty in sight.

The underlying reason for that is plain and simple: both the Japanese and the US governments are currency issuers. By definition, they are able to spend as much money in their respective currencies as they like. In that sense, they always have an infinite amount of room to move.

The only question can therefore be: How much of this maneuvering room should be used?

The answer to that question does not lie in financial data alone, but must take into account the state of the economy at large and whether additional spending might hit an inflation barrier. In the current situation, spending directed towards job-creation is unlikely to hit such a barrier, while handing out more money to the rich could drive speculation on resource markets (the money will be "invested" somewhere, after all) that can cause price increases and thus inflation.

[RuadhanMc]

It's a fascinating situation. I don't claim to know the answer or how much debt is viable. I do agree that the US isn't in the same basket as other debt-laden countries. They are an exception -- but for how long... I don't know.

I think there is a ceiling -- and I'm not talking about the official debt ceiling -- of debt. Is it 100% debt to GDP? 200%? 300%? It's somewhere. There's a point at which it just isn't possible to repay the money.

[nhaehnle]

Sorry for repeating myself, but the US government will always be able to repay the money.

They are the ones who maintain the authoritative databases that contain the information about how many reserves the commercial banks have and who owns the debt. The only obligation associated with repaying the debt is to change an entry in the debt database, and do a corresponding change to an entry in the reserves database. Since the government maintains these databases, they will always be able to do that.

There are a number of problematic things that might happen in the future. For example, if all the owners of the debt suddenly decided to go on a spending spree, then they might cause some (heightened, but non-hyper) inflation if the economy simply isn't able to produce enough real goods and services to fulfill the increased demand. Then politics has a choice of either weathering the inflation or raising taxes to fight it, and there might be other tough choices of equity and social justice involved.

But the ability to repay the money simply cannot be an issue, and nobody can accurately predict whether any of those other problems will ever happen.

[RuadhanMc]

It was a poor choice of words on my end.

I take your point that America will always be technically able to print money in order to pay back the debt.

But wouldn't printing that amount of money destroy the value of the US dollar? Causing all sorts of other issues?

[nhaehnle]

I see now what you meant.

I think it depends entirely on how and why the debt is paid back. We probably agree that the act of paying back the principal of some bond cannot have an inflationary effect if the owner of that bond just uses the money to buy the next bond, so it's not the act of printing the money itself that causes inflation.

If they use the money to buy other things then this might cause inflation if it happens at a large scale, say the hypothetical spending spree that I wrote about in the parent post.

The thing is, since it is pretty much impossible to predict when and how such an event is going to happen, and the best remedy likely depends on that knowledge, it seems unwise to me to cause damage to the economy right now in a (probably ultimately futile) attempt to prevent such events from happening in the first place.

It seems even more unwise to cause such damage since such an event may never happen anyway. After all, it is actually very rare for a government to (net!) pay back part of its debt, and paying back all debt is almost unheard of. Except for the rare times of government surpluses, the US government has never actually net paid back its debt over quite a long history by now, and I see no reason why that should change in the future.

After all, there is significant evidence that government surpluses cause recessions: http://www.newdeal20.org/2010/02/10/the-federal-budget-is-no...