Debt Shmedt: the American Debt Problem

Currently the American debt obligation stands at 22 trillion and counting. This is an astounding amount of money for any one entity to hold. This number is growing because our current American government runs a deficit of nearly a trillion dollars. Rightly so Americans are deeply worried about the state of our nation. It would take $68,376 from each citizen to pay off this debt. America needs a solution or does it?

A couple nights ago, it was a late night and a friend dove into the aforementioned American debt problem. He was telling me about this genius macroeconomic policy starting to circulate in political circles: Modern Monetary Theory. MMT is the concept that American government has a monopoly on currency and should use this power to drive growth and limit unemployment. Under this policy, our debt would balloon to enormous levels causing Government expenditure to far outpace government revenue. The current American government's deficit would be tripled maybe even quadrupled under this kind of policy. This would mean Americans would have more money in their pockets. Under the current philosophy, we should spend $100 and also have that same amount in revenue. It makes sense a balanced budget. Balanced budgets are important for households and companies (maybe less so in the era of Uber and Lyft) but should the same be true for our government. This is the crux of the question.

Before I go any farther, I do want to highlight that there is currently a government that is using the principles of theory to drive growth with low inflation and low unemployment. That country is (*drumroll please*) Japan. The current debt obligation of Japan is a whopping 255.11% of GDP. Could you imagine if this was the current state of the US debt? Heads would explode. This begs the question though. How is this possible? It is standard practice for Moody's credit rating to downgrade debt ratings for governments when they see imbalances and ballooned debt. Japan has defied the odds. Party because of solidarity among its financial elite.

In 2011 when the Fukushima earthquake struck Japan, the country was left in ruin and naturally the government invested a ton of money into the recovery. They paid for this by accruing an enormous amount of debt. In 2015, former Prime Minister Naoto Kan called the situation "urgent". Japan introduced taxes to offset inflation and slow the growth of public debt. This initiative failed because these taxes became a burden for the economy. Then came along Shinzo Abe who got rid of these heinous taxes and instituted economic stimulus that caused the stock market to sky rocket. The debt's interest rates stayed steady though. Thanks in part to the fact that the Bank of Japan buys 70% of government bonds. The ballooning debt which was originally caused by a terrible natural disaster has now powered a decade of incredible growth. Japan has been able to do this by setting negative government interest rates and having its own institutions insulate them from international skepticism.

Cool sounds great. Lets get this going! Debt debt baby!!!!!

Woah not so quick. There are a couple things about what's happening in Japan that would not work so well here. One is that our current political system or more especially conservative leaders would never allow something like this to happen. For them, this kind of policy ignores the reality of economic policy and could be disastrous for the American economy. The other reason and this one is more nuanced is that Japan's sheltering from skepticism by releasing most of their debt onto their own banks would be much harder in the United States. Could you imagine telling a large US Bank that they need to take your debt to protect the American economy? This is how I think that conversation would go.

US Treasury: We want to expand our debt so that we can drive growth. Don't worry though we are gonna protect ourselves by having you guys buy most of our debt. Make sure interest rate stay low. Sound like a plan?

Large US Bank: Are you serious? What fools are running the treasury?

My point here is that the US banking system is far too independent to ever go for something like this. Banks currently own about 674 Billion dollars in public debt. That is a small fraction of the nearly 20 trillion debt figure. Interestingly enough Japan and China both own nearly 1 trillion of our debt. This is what makes Japan's case so unique. Nevertheless, this is an interesting concept that the likes of AOC and Bernie have embraced. We'll see where the debate goes on this, but for now it looks like the debt will stay and its not necessarily a bad thing. I am not complaining about the extra money in my pocket!