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Chapter 1: What is the main topic discussed in this episode?
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I'm here with Noah Smith. Noah, thanks for joining me. Hey, thanks for having me on. You've got a great Substack, which many people will have read. It's Noah Opinion, a pun on your name. Noah Opinion. Noah Opinion, but they can find you, no doubt, under your name as well over there on Substack. There's a lot to cover.
I mean, you touch many interesting topics, but summarize your background first, and then we'll just jump into your wheelhouse. All right.
Well, background, I was originally a physics major in college. Then I lived in Japan for a while. Then I did a PhD in economics at the University of Michigan, worked for a couple of years as a finance professor at Stony Brook in New York, and then quit to become a writer. And so now I just write about economics.
Well, you're good at that. And yeah, you produce these very clear articles that walk people through issues of great importance to our society. And it's a pity we don't spend more time thinking about some of these issues. I want to raise the first one, which you wrote about recently, and I think you've had some change of opinion on, and that's the national debt.
I don't think I've touched the national debt at all on this podcast. I think maybe I asked Lloyd Blankfein one question about it, and I can't even remember why he wasn't more worried about it. But I really do kind of want to walk through this almost in an econ 101 way. But big picture, how do you think we should think about the national debt at this point in the U.S.?
The United States is becoming a high-debt country compared to other rich countries. And this didn't used to be true. It used to be that European countries were sort of more in debt than us, and Japan was much more in debt than us. And now, after the Great Recession and COVID and sort of the lack of resources
spending fiscal restraint that we've had in the years since COVID, we are a high debt country. And this carries with it dangers. Nobody knows exactly when debt starts becoming a problem. There's no hard line. People have tried to define that line and nobody really knows. But at some point, the problems start creeping in. private investors start being unwilling to buy the government's debt.
So, you know, the government borrows money by issuing bonds, right? It sells bonds, some bonds to foreigners, but most bonds are just sold to like banks or, or regular people even, but, but mostly banks. And then, um, you know, us banks like, like chase, you know, buy a bunch of us bonds. And then, um, you know, they sell these bonds and then, you know, they pay some interest rate on the bonds.
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Chapter 2: What is the significance of the U.S. national debt?
raise the borrowing rate, right? And this cools off the economy. But as you just pointed out, raising the rate of interest is also working against the government's ability to pay back its own debt, which keeps rolling over. Exactly.
So you have this trap where people won't buy your debt, so you need to raise the interest rate to pay off the debt, but then you have to roll over the debt at the new higher interest rate. And so then you have to pay more debt. And so you have to borrow even more. And then people are like, wait a second, I can't lend you that much. And so you have to raise interest rates again.
At some point it stops and private demand for your debt just collapses. Chase won't buy your debt. Grandma won't buy your debt. China won't buy your debt. Nobody will buy your debt.
Is there any reason to think that the U.S. is anywhere near defaulting on anything or that there's a perception of risk in loaning money to the U.S. government? I mean, we are the backstop for the global financial system on some level, right? I mean, everything is anchored to the dollar or certainly most things are. This gives us an unusual kind of superpower here.
What are the signs of that being more precarious than anyone would want it to be?
So what you want to look at there are interest rates on long-term bonds, and you want to look at the strength of the dollar. So if the strength of the dollar goes down at the same time that the interest rates on long-term U.S. government bonds goes up, that indicates that people are pulling their money out of America. And we have seen some of that recently.
So if you want, I can explain why those two things together show that.
Yeah, no, that would be great. But still, high level, you're saying we haven't seen a kind of rush for the exits there in any way that is scary? Or you're saying we're seeing something that should be unnerving to people who are paying attention?
It's a little unnerving because the idea of the collapse of the US-centric global financial system and abrupt devaluation of the dollar, a potential US default or inflation, those are two forms of a similar thing. The potential of that should scare people, even if it's not imminent, right? It's such a bad thing that could happen. It's like you're...
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Chapter 3: What are the dangers of high national debt levels?
What matters is when all those people stop buying the debt. And we don't know, for America right now, when that point is going to be. We could tell you for, you know, Britain many years ago, or Russia many years ago, or America 100 years ago. But those aren't necessarily comparable. Those aren't necessarily the same. There's no law of the universe here. There's no gravitational constant here.
There's no law of economics. And some people tried to establish a threshold, but there's no threshold. It's really, you can't put a number on it when people start to get scared. It's when, it's when people start to get scared and there's not even an objective because expectations based, right?
It's based on when all these people decide to stop buying the government debt and that's human psychology, right? We don't know when grandma's and chase and all these people are going to stop, are going to decide to stop buying the debt. We don't know, like it's human psychology based. And so I, you know, we don't understand that.
And there can be, you know, this very rapid shift in expectations where people say, okay, America's done. you know, like they're not going to pay their debt back. This thing is collapsing. Let's head for the exits. And then there's the stampede, right? Where some people head for the exits and then everyone's like, well, those guys are heading for the exits. I better head for the exits too.
And then everybody tries to stampede out all at once. Um, there's, you know, a million econ papers on how this happens in like poor countries, but it rarely happens in rich countries. But if it does happen, it's really catastrophic. And so could it happen? Yes. What's the level of debt that's scary? I can't tell you. Like there's probably, there's no threshold. There's no tripwire.
If there is, we can't see it because it's different for every country in every time period.
Well, how much does our status as the reserve currency for most of the world protect us from this kind of calamity?
So the reserve currency means that other countries hold dollars as their reserve. They hold a bunch of dollars in order to conduct trades on the international trading system or buy stuff from America or things like that, invest in America, things like that. The fact that they hold all those reserves is a big part of the reason why this would be such a calamity.
If they didn't hold those reserves, it would be much less of a calamity for the world, for the dollar to drop in value for America to have an episode of high inflation or sovereign default.
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Chapter 4: How does fiscal austerity impact economic stability?
Then inflation went up and people started laughing at the MMT people and listening to them less. And the MMT people, you know, then Warren Mosler, The ultimate guru of MMT came out and said, oh, debt's too high now. We could get inflation. He just made this pronouncement. There was no system. There was no formula. There was no transparent process by which he made that pronouncement.
But then this accelerated the loss of intellectual currency that MMT had in a lot of people's eyes because they realized that whether debt is good or bad depends entirely on the pronouncements of a few gurus.
But the general slant of their contributions has been to not worry about debt to GDP ratio.
That's right. They have done a lot of yelling of people to not worry about debt. I would not listen to them if I were you or anyone.
I'm sure there are MMT fans who are going to think I should have pushed back here, but the truth is I don't know enough to push back intelligently, and I'm worried about debt for other reasons. So at the moment, the interest on the debt exceeds, I think, every government expenditure except Medicare and Social Security, and it's projected to exceed Medicare in 2028. Does that sound about right?
About right, yeah. What are the escape routes here? I have a list of, I think, five, which I might have gotten from you. I'm not quite sure where I got them. I can tick them off and then we can discuss them. But my list here is number one, grow out of it. Two, inflate it away. Three, austerity. Four, financial repression. And five, default or restructuring, which does not sound good at all.
So how do you think we get out of this situation? What is the situation? We have close to $40 trillion in debt. That sounds about right. And again, interest on the debt is growing and eclipsing more or less everything, including defense now. What do you think we will do and what do you think we should do if there's any daylight between those two things?
I don't actually know what we will do because politics is kind of unpredictable and I'm not a specialist in predicting what we'll do. But what we should do is, number one, we need to, once we start worrying about the debt, we need to enact fiscal austerity. And we did that in 1993. We did fiscal austerity after a few years of everybody being really worried about the debt.
If you're old enough to remember the, which I think you are, if you're old enough to remember the 1992 election, the candidates were competing to say who could cut the debt more. And so it's not this idea that politics is this eternal goodie bag where everybody just wants infinite goodies and no one cares about debt is not necessarily right because I've seen the opposite.
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Chapter 5: How does inflation relate to government debt?
And I started, you know, understanding that like everyone's scared about debt. So when I was, you know, 10 years old or whatever, I thought debt was bad. Because I saw people on the TV talking about a lot. And so we can do that. And so we'll have to- Cutting the deficit is one thing.
Cutting, actually making a meaningful cut to the debt would require, it's got to require growth, right? I mean, we're not going to just, you know, keep the plane flying at 30,000 feet and whittle away on this $40 trillion debt. Yeah, so growth happens.
I mean, you know, growth isn't grinding to a halt. In fact, if anything, I'd say that growth will accelerate a little bit due to the AI boom.
Mm-hmm.
But that doesn't mean when I say accelerate, I don't mean we're going to grow it like 20% or whatever the AI, you know, boosters say. I think, you know, maybe the standard forecast, maybe we'll grow it two and a half percent or maybe even 3%. That would be amazing. But like, but we will continue to grow. Right. Our economy will continue to grow. There are things we can do to make it grow more.
One thing is, you know, we normally talk about growth in terms of per capita living standards, but we can also grow the total size of the economy by bringing in immigrants. And that's exactly the opposite, of course, of Trump's strategy, especially high skilled immigrants that pay lots of taxes. So we can bring in like, you know, millions of smart people from India and we can do that.
And then, you know, but Trump doesn't want to do that. So that's a sidetrack, but we can do that. So that's one thing we can do is to simply lower the deficit and let growth erode the debt over time. That's the most important and best thing we can do is fiscal austerity, by which I mean a combination of tax increases and spending cuts, and then allowing growth to take its course over time.
That will take a decade, two decades of that, but that will definitely fix a lot of this problem.
And we can't inflate it away because, as we've just said, the debt rolls over and we have to pay the consequences of inflation while paying the debt. Well, no, we can inflate it away.
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