The responses to yesterday's post about America's fiscal future reveal what I think are a lot of misconceptions about the way financial symptoms work:
Cost doesn't equal risk One of my commenters complained that I was using costs and risk interchangeably, and that they are not the same thing. Indeed, they aren't always. But new obligations always add more risk to your balance sheet, even if you think you're also adding the revenue to cover them, because if the revenue doesn't materialize, you're in a dreadful hole. And the greater the existing deficit between revenues and obligations, the more risk any new obligations add. If our deficit were in rough balance, the new obligations would add only trivial risk. But we're running a roughly $700 billion structural deficit over the next ten years, which is greater than or equal to 6% of GDP.
The US won't actually go bankrupt, because we can always inflate away the value of our debt This won't work. We have an independent central bank, and any concerted effort to appoint a Fed chair willing to inflate away our debt would be made difficult by both the dirth of pro-hyperinflation economists/bankers, and the fact that markets would freak out and jam up our interest rates sky high. Moreover, inflating your debt only works if your structural deficit is small relative to the outstanding amount of debt. As things now stand, by 2019 our structural deficit is scheduled to be about 6% of GDP, while our debt will be around 65% of GDP. That may not sound like much, but over a few years, rising interest rates could rapidly confound any attempt at inflating away our debt.