Is The U.S. Going Bankrupt? Debt Growth Is 'Explosive' | Barry Eichengreen

one of the tax increases that have hit Headlines by storm over the last week is of course the Biden administration's proposal to raise capital gains taxes to 44.6% but is this kind of policy the right approach to fixing our deficit issue well I think higher um uh taxes on the very wealthy uh have to be part of the solution they will make a very modest dent in the budget deficit but they will also um create a sense of fair burden sharing there's you know no reason that Warren Buffett should be paying lower taxes than his secretary higher taxes on on on the very wealthy has to be part of that solution we're talking about the issue of the rising debt and deficit levels in the US perhaps abroad what do these figures mean for the future of our economy the US federal debt continues to grow at a staggering rate it's projected by the Congressional budget office to reach 192% of GDP by 2053 many have warned about the US's Rising fiscal situations including feter jome Powell and JB Morgan CEO Jamie Diamond our next guest has a different take slightly different take on what debt means for our economy and perhaps what our future may look like he is uh Barry ien green the distinguished professor of economics and political science at UC Berkeley he was a senior policy adviser at the IMF between 1997 and 1998 and he is a co-author of the book called in defense of public debt which we'll be discussing today welcome to the show Professor honor to meet you good to be here David Professor I green so we'll be talking about your work your book you've met uh Jenna Yellen current uh uh Secretary of the Treasury before we get started what what what does she like to work with um I don't know that we ever worked together and we never co-authored research together or taught together but Janet had an office in the economics department for a couple of years next door to me and then later in office in the business school here at Cal and to answer your question um she's a thoughtful person with a great sense of humor very good well let's talk about the uh US debt situation currently so several people uh on my show and others have commented that we are perhaps heading towards some sort of debt crisis and the ex you know the the severity of this crisis is to be debated but the figures are currently professor 121% of debt G P federal debt the highest level since World War II the US is reported to be adding $1 trillion doll of federal debt every 100 days interest payments on federal debt alone exceed $1 trillion doll now which is about a third of tax receipts federally Fitch downgrade of the US um long-term credit last year as you know from double A Plus to AAA and they cited concerns such as fiscal deterioration over the next three years my question is Professor I green are we headed for some sort of debt crisis is this sustainable so something can be both true and exaggerated so I think much of what you described a moment ago David is is true but exaggerated some of the debt the government owes to itself you know it's held in the Social Security trust fund and elsewhere so what's relevant here is debt in the hands of the public and that is about 100% of GDP not that higher 121% figure uh this doesn't constitute an immediate crisis um servicing this debt is fully within the capacity of the federal government so forth and so on if you look over the longer term if you look out 10 20 30 years the prospects become more troubling so I do not see a crisis of debt sustainability a fiscal cliff um a terrible thing happening car crash happening in the next 2 or 3 years but uh we have to get our act together in terms of um the budget over the next decade or so and the prospects here are not great as you well know political polarization is um uh very big problem in the United States there's no consensus about uh whether to cut spending and if so on what whether to raise taxes and if so on whom and uh in order to get a handle on this debt problem we're going to have to to reach a political consensus uh I would observe that the United States is by Advanced country standards by oecd standards still a relatively low tax economy and that part of the solution here will be to get corporations and Wealthy individuals to pay more taxes part of the solution will be to means test transfers so there's no particular reason why billionaires should be receiving Social Security payments there's some obvious things that a politically functional government and society would do to get its arms around this problem but it's not clear that the United States has a politically functioning functional government without any changes to the tax code or um or uh other uh budgetary priorities just all else being equal will the1 trillion dollar of interest payments that I cited earlier will that figure eat into uh other government programs Medicare social care defense fundings defense spending so on and so forth absolutely so that um figures you cited before come from the Congressional budget office and the CBO is mandated by law to project future debt and debt servicing costs on current law in other words on the Assumption of no changes in uh the current tax laws and and and mandated spending programs and so forth so yes this uh debt in the hands of the public continues to rise and uh after 2030 or so it begins to rise alarmingly on current law so at this point it it's customary to in in invoke the uh late great economist herbstein father of the humorist Ben Stein who famously said if something can't go on forever it will stop and this explosive growth of the debt will stop one way or another we just don't know whether it will stop through uh tax increases spending reductions and we don't know when one of the tax increases that have hit Headlines by storm over the last week is of course the Biden administration's proposal to raise capital gains taxes to 44.6% it's not a blanket raise right it only from my scanning it applies to individuals and corporations with an income above $1 million and an investment income above $400,000 so it doesn't apply to everybody but is this kind of policy the right approach to fixing our deficit issue well I think higher um uh taxes on the very wealthy uh have to be part of the solution they will make a very modest dent in the budget deficit but they will also um create a sense of fair burden sharing there's you know no reason that Warren Buffett should be paying lower taxes than his secretary that contributes to the widespread uh belief that the tax system is unfair and we're going to be able to get people and corporations to um pay taxes only if they think that the burden is equ equitably shared higher taxes on on on the very wealthy has to be part of that solution higher taxes on multinational corporations has to be part of that solution as well how would you respond to the argument then that taxing the wealthy and perhaps raising corporate taxes would incentivize corporations to leave or we might see a capital flight out of the US or in the worst case lower productivity well um number one the evidence for that is relatively weak if you look at the empirical studies number two that problem can be solved through International cooperation so you will have noticed that secretary Yellen and others have been negotiating an international tax agreement to harmonize corporate taxes so that corporations can't shift their royalty income to low tax jurisdictions like Ireland or or wherever so International cooperation is an important part of the solution to this as it is uh to many other problems you've said in another media appearance that um the US government needed to take on sizable debt levels to handle the um 2020 pandemic likening this to a parent who takes on debt to obtain life-saving surgery for their children can you expand on this the argument of the book that you mentioned uh earlier the 2021 book with co-authors in defense of public debt is that issuing public debt is an important instrument for governments dealing with emergencies so where does public debt come from historically governments developed markets in public debt when they were forced to fight Wars defensive Wars in order to survive they issued debt to raise the resources to support the military was part of an all hands on deck strategy and the same thing is true for governments that are dealing with natural disasters or public health emergencies or I would submit climate change emergencies so going forward we have to uh um move away from uh fossil fuels by investing in costly um capital goods that will provide us uh clean energy you know electric Chargers uh for our cars so forth and so on those costs which have to be paid upfront are going to have to be financed hopefully by issuing Deb debt now and the savings on uh uh future avoiding future climate disasters will enable us to service and repay that debt o out of incomes that are going to be higher in the future than in in in the counterfactual where we do incur that climate disaster so what has been true in the past about issuing debt to fight Wars of survival or to avoid uh allowing pandemics that could kill millions of people to run wild will apply in the future to uh climate change uh mitigation as well um how would you respond to again the counterargument that the government really has just created inflation through spending and widen the deficit which we'll have to pay off later inflation is in a form an indirect form of Taxation well I think um in in in in inflation is uh under the control ultimately of the Central Bank of the Federal Reserve or in in in in in your case the Bank of Canada um central banks can come under pressure to buy government bonds and uh that can have inflationary consequences so for a long time from 2008 through 2020 uh central banks bought government bonds and that didn't have inflationary consequences because other things were exerting a deflationary effect on the economy that's a reminder that government debt doesn't always and everywhere immediately translate into inflation it didn't between 2008 and 2020 When government debts expanded dramatically more recently it has but the FED uh to pick the obvious example is pretty uh clear about its commitment to bringing inflation back down to 2% in 20 by 2024 give or take a year there is a worry that some future US president you can fill in the blanks might uh uh uh appoints like-minded people people like-minded to that president to the Board of Governors and and pressure the FED not to prioritize inflation but rather to limit Debt Service and costs and allow inflation to run wild in which case we will have a problem so there is a potential problem the solution to it is preserving the independence and the anti-inflationary Mandate of the central bank if we do that I don't think those inflationary cons consequences that you're worried about will necessarily follow so you mentioned that inflation is ultimately in the control of the Central Bank I'm guess guessing and please correct correct me if I'm wrong Professor but I'm guessing you don't subscribe to the theory that fiscal dominance is taking place right now which is to say that fiscal policy is more important for generating or decreasing inflation the monetary policy I agree with the point that fiscal dominance is a is a threat or a danger but there's a solution to that problem which is maintaining the independence of the Central Bank and appointing to the board people who prioritize inflation control rather than doing whatever the government asks it to do right and do we have overwhelming evidence that the central bank has maintained its independence and has more or less operated within uh its own its own uh agenda and not under the influence of the White House well so politics are always uh lurking in the background when central banks make policy but my own reading is that over the last year or two the FED has made uh abundantly clear that it prioritizes inflation control and that it will do what it takes to bring inflation back down toward 2% and keep it there okay whether the next president will permit it to maintain that commitment time will tell so you don't believe a debt crisis is imminent in the US can we can you draw on some historical examples in which in other countries perhaps uh government excessive debt either by private borrowing or government Bing uh borrowing has led to some sort of economic collapse and why America may be different today well you only have to look at a country like Argentina for example to um see how this plays out repeatedly over time the United States has the advantage that its debt is denominated in its own currency which uh certainly helps uh other countries in Europe Japan are a reminder that there is no magic number which debt becomes unsustainable um the evolution of the debt depends on the government's budget deficits but which you and I have been talking about but it also depends on the growth of the economy what matters is the ratio of debt to GDP and we in the United States are doing a pretty good job at growing that denominator which tends to maintain the sustainability of the debt speaking of Argentina which you brought it up just this is the side on Argentina um the government's extraordinary inflation levels Javier M during his campaign Trail promised to dollarize the economy he didn't do it should he have done that well I think they Argentina has tried that um in the past it had a convertibility plan where it pegged the peso to the dollar for a decade starting in 1991 and that collapsed uh in a heap I think um you can bring inflation down and restore the sustainability uh of your debt only by forging a political consensus at home on doing the necessary not through artificial means like adopting somebody else's currency so I don't think dollarization would have provided a a solution in AR um let's talk about some other solutions to uh to lowering the debt you've talked about debt consolidation before um I think you've mentioned that in the past debt consolidation which is the idea that you can restructure debt with a lower interest rate may have worked but it may not work now currently uh can you can you expand on why well so to be clear um when we talk about debt restructuring we're talking about emerging markets and we're talking mainly about Emerging Markets with uh foreign currency denom ated dollar denominated debts uh they uh when they face a fiscal crisis and in which they don't have the dollars can't earn the dollars needed to stay current on those debts they have in the past uh tried to renegotiate them with their creditors uh Banks and investor and bond holders and with multilaterals like the international monetary fund and the World Bank the problem now is that the Creditor Community is much more heterogeneous it includes lots of of bond holders and hedge funds and so forth and so on and notably it includes China and China doesn't isn't used to playing by the same rules as other governments when it faces us Sri Lanka or uh another country desperate to renegotiate its deaths so the debt restructuring processes become uh fraught more difficult uh more time consuming more inconclusive so the idea that when you're really in an unsustainable position you negotiate with the creditors who agreed to take half a loaf rather than nothing at all completing that renegotiation has become much more difficult so um the point of a paper I wrote for the Kansas City fed's Jackson hle conference last summer is that virtually all of the roots to Bringing Down High debts in Emerging Markets are foreclosed World Bank says they're going to grow more slowly going forward uh interest rates are going to be higher going forward debt restructuring will be difficult going forward and running large budget surpluses over for an extended period is difficult in politically polarized societ societies which is a simple way of of characterizing politics in a whole lot of countries okay and how would you evaluate the state of Taxation today do do you believe that there is a point and let's call it the laugher curve in which a particular tax rate would optimize revenues well I believe in that in in in theory and maybe in practice sler curves exist there comes a point where taxes are so high that ta tax revenues begin to go down because people evade taxes because the growth of the economy slows um but whether we are approaching that point depends on the the particular tax you're talking about the particular country you talking about and as I said before I don't think that overall the United States to take the OB obvious example is there that taxes in the US are are lower on average than in almost every other Advanced economy um as I said the US is growing in healthy fashion compared to most other advanced economies at the moment that that's not in my view because it has a particularly low or high tax burden but rather because we have uh a flexible economy with a lot of um clever entrepreneurs many of whom have immigrated here from abroad and because there's been a bit of fiscal stimulus maybe too much fiscal stimulus over the last two or three years okay so you in your view there's room for taxes to grow somewhat um before we can optimize revenues through taxation uh let me ask you this professor would there be a catalyst or an event um which would prompt the government to act in other words either drastically reduce spending in other words austerity Implement austerity or dramatically increase taxes in other words they have to address debt there's a problem what is that problem so in in a variety of other countries there has been a crisis where uh all of a sudden the government cannot sell bonds to anyone and either the central bank has to buy them resulting in 300% inflation that's the Argentine case at the moment or the government uh defaults on its obligations um I do not see that happening in the United States for the foreseeable future US Treasury bonds are still regarded as the one of the safest Assets in the world the market in treasury bonds is deep and liquid so I think what we are likely to see in the US over the next decade or two if nothing is done is gradual continuing increases in interest rates will that be enough to catalyze the kind of policy changes that you're pointing to David I don't know uh will that be enough to make the voting public decide we need to uh put in office uh in the Congress Centrist politicians who can work across the aisle and agree on consensus policies that allow for adjustments both on the spending and the taxation side I don't know but the solution has to take one of those forms are you are you a proponent of modern monetary Theory mmt or the idea that unless under certain constraints government spending higher government spending wouldn't directly lead to inflation no I'm not a not a proponent of mmt because I'm not always sure what it means the extent fair enough that uh I understand what it means that deficit spending is uh never under any circumstances inflationary no I don't think that's uh uh a sensible economic theory as I said before uh if nothing is done in the United States we are likely to see overtime ongoing if gradual increases in interest rates that will make servicing the debt more difficult that's why I think something has to be done in your research have you observed any relationship between the Surplus or deficit level of the government and uh stock market performance I mean in let's just take the last decade for example since 2009 up until basically this year the American Stock Market for the exception of 2020 has seen the longest bull market in US Stock Market history this entire period was coincided with Rising deficit levels so uh this relationship hasn't always been there in the past it's somewhat inconsistent what's your observation two reservations would be number one um the behavior of stock markets depends on many other things as you know besides um government spending deficit spending or otherwise and number two the impact of deficit spending on the economy and on the stock market depends on what the government is spending on so if it's building um tanks and bombs versus building highspeed Rail and uh um factories uh that is likely to to have you know implications for the stock market it depends on the on the composition and purposes of government spending as well well as the level generally speaking then do you think that current government spending is conducive conducive rather to higher asset prices in the future oh I I I think predictions are difficult especially when they involve for sure the future so I can I can say something about the past where I think um uh deficit spending uh by the government has contributed to strong demand which has made for relatively strong stock markets up through early 2024 what will happen in in in in the future none of us know okay uh let's move on to another body of your research which is uh Reserve assets uh before we talk about what may happen in the future let's just talk a little bit about the past his Al speaking first of all how do we Define a reserve asset it has it always been historically tied to a dominant military superpower so I think throughout history uh the dominant International and Reserve currency has been the currency of a a country with a strong economy um strong financial markets deep and liquid financial markets open to the rest of the world and a country that can defend itself with a strong military that uh can encourage its allies and partners globally to do their transactions make their payments and hold their reserves in its currency so I wrote an earlier book about this with co-authors called how Global currencies work and the recipe um for Global Currency status in that book was um uh size you've got to have a large economy stability of that economy and financial markets and liquidity size stability and liquidity of those markets and to that that I would add security the ability to uh of the country and its government to defend militarily and diplomatically its interests so uh the stew involved the recipe uh has those four ingredients I think size stability liquidity and security well then it might be useful if EST or guest the future of Reserve currencies to also s guess the future of uh the world order so Ray Delio in his book The Changing World Order suggests that China will supplant the us as the next Global superpower he's not entirely alone in that Viewpoint do you agree with that view so let me go back to my four elements economic size China will eventually overtake the United States because of the sheer size of its population um stabil are Chinese financial markets is the Chinese property Market uh stable or not liquidity Chinese financial markets are not entirely open to investors in the rest of the world because of Chinese Capital controls and the like and security uh China has a growing uh ability to project power internationally it has a couple of uh aircraft carriers now but does it have geopolitical allies who you know are other than Russia who are on the same page with it security wise so I think um Mr D Delio and people who subscribe to his view have some some questions to ask okay and answer well uh a question for you then would be do you think that the US dollar could be challenged as a dominant Reserve currency in I mean look neither of us are going to be around a 100 years so let's go before then you know within our lifetimes well I think um if China continues to grow successfully its growth is slowing down if it maintains the uh stability of its economy and financial markets if it opens those markets to the rest of the world and if it develops harmonious diplomatic relations with other countries yeah the Chinese renman B will be become an increasingly uh attractive alternative and rival to the dollar but I'd remind you the dollar accounts for 60% of the reserves of central banks worldwide the Chinese renman B accounts for 2 and a half% the dollar accounts for is on one side of like uh 70% of Foreign Exchange trades worldwide the renman B is on one side of like 3% so China has a long way to go before the renman B uh constitutes a serious rival to the Dollar on that note can a transition from one Reserve currency status to another country can that transition take place peacefully generally speaking um so the transition from the pound sterling to the dollar occurred when while the US and the UK were allies you know fighting on the same side during World War I there was a military conflict between us and and the Brits on one on the one hand and Germany and its allies on the other hand going on at that very time that um weakened Britain's financial position strengthened ours so the answer to your question is kind of complicated but the transition from uh the pound sterling to the dollar as the leading international currency uh occurred when relations between us and the UK were relatively harmonious so yeah it can happen Okay uh I mean it's also true that no to democracies have Al have ever fought in kinetic war with one another but China as you know is not exactly um on the same political Spectrum so one could argue that some sort of conflict between these two Nations is more likely than the UK and and the US would you agree yeah I you know I like everyone else I worry about geopolitical tensions between the US and and China but there's one more Point that's relevant here um I used to make this point every time I went to China before the pandemic I haven't been back every leading international and Reserve currency in history has been the currency of a political democracy or uh a republic with a legislature or Parliament to check arbitrary action by the executive so that's true of the dollar it was true of Britain and the Sterling before that it was true of the Netherlands and the Dutch Gilder before that and it was true of the Republican city states of Venice and and and and Florence and Genoa in the 14th century that investors are comfortable about parking all their Assets in a country and its currency only if they're relatively confident about the stability of that country's policies because there are checks and balances checks on arbitrary action by the executive and that's not true of President G and the poit bureau fair enough let's move on to a um final subject of our discussion which is cbdc Central Bank digital currencies you've written you've written about this before uh in your article the trilemma of Central Bank digital currencies you wrote that um well you've argued that Global adoption of cbdcs is somewhat unlikely due to political obstacles and a trilemma can you can you expand on what what this trilemma is well I'm not not sure I would I I I would still subscribe to the trilemma language but uh I think um yeah this was written a few years ago so maybe you've updated your views cbdcs are are are still as me many of us say uh a solution in search of a problem many of the things that they are lauded for like enhancing Financial inclusion Bringing Down the cost of payments can be accomplished through other means fast payment systems like fed now um cheap bank accounts like India has mandated that its commercial Banks provide and in terms of crossb payments uh we know how to make cbdcs convertible into one another the bank for international settlements knows how to build a multiple cbdc bridge in cyberspace but there are political obstacles there uh our is the US China and other countries and their central banks going to be able to agree on how to govern and operate this bridge so I think the answer is not for the foreseeable future so that the use of cbdcs in crossb payments is going to remain limited the dollar will therefore Remain the dominant vehicle for completing those payments well regardless of what what countries can use this for I think that would be the next question is why they're doing this because according to some reports like the Atlantic Council for example there's currently 134 countries exploring the possibility of of introducing some sort of cbdc why is there this trend if like you said um the dollar can just be used for the majority of crossb payments well I think there is a lot of trend following going on okay here and there is a bit of fear in the background as well so first there was fear of Facebook or meta and its proposed um uh stable coin Libra it was called at the time if uh and so there was the fear that payments would migrate away from central banks toward Facebook or one of its Rivals so creating a cbdc was kind of a counter move there number two the People's Bank of China is moving in this direction and there is fear of China that China knows something maybe that the rest of us don't about the advantages of having a cbdc so if China's doing it we need to do it or to explore it as well but fear of potential competition and being left behind and uh Trend following and somewhat spurious arguments about things like Financial inclusion are not a sound rationale for moving from exploration which is fine toward actual implementation which I think is more problematic is there a trend of governments around the world wanting higher levels of surveillance or control or both on their populace and a cbdc is the most direct way to do that you could essentially monitor every single transaction that happens within a border um if you move to Wards a cach the system is there any truth to that theory well that's what people like Ted Cruz tell us we should worry be worried about and I think uh again that's a uh spous concern that uh even the People's Bank of China has made abundantly clear that it will only be able to uh uh observe limited information about uh transactions using its cbdc and the and and and the FED has made even more clear that uh anything that It ultimately moves forward with will not be a surveillance tool I you know you have to remember that if you go down and deposit $10,000 in your US Bank that information immediately gets reported to the US Treasury so there's already Financial oversight because we want to avoid money laundering and terrorist finance and tax evasion and so forth so um you know what matters more that that my bank has to report to the treasury every time I deposit $110,000 or that the FED knows something about my latest transaction at Starbucks I'm not sure what which the bigger deal is well the other concern is that even more extreme uh and a more extreme measure would be the government directly controlling what you can or cannot spend money on for example the just one example I've heard um during the pandemic say there is a curfew you are not allowed to go out during the curfew and so therefore you cannot spend money past 10 p.m. for example your bank account certainly wouldn't just wouldn't work is that something that you're concerned about well I think the um uh ethos of confidentiality privacy anonymity in in countries like the us or Canada is uh sufficiently deep and pervasive that uh government wouldn't mess around with that in China apparently if you go out at the wrong time and spend your money on the wrong thing in violation of a curfew that affects your uh social score you know everybody has one in China so you don't need a cbdc on top of that in order if if you live in a surveillance state in order to make the surveillance work okay uh now final question the trend of dollarization with the concept of dollarization I've heard in the Press uh countries like Russia Putin has been very clear about wanting to dollarize for I guess political and economic reasons I wonder if other countries are following suit certainly within the bricks not every country wants to follow Russia's example India has stated that they don't want a common currency um I just wonder if this trend of dollarization is going to grow bigger Beyond just Russia and its allies um it has not grown bigger since uh the imposition of sanctions by the United States and its allies on Russia at the beginning of 2022 so since then there's been a lot of talk on the part of um politicians and Central bankers and and others about the possibility of diversifying away from the dollar because of uh these policies of Greenback weaponization as they're sometimes called but talk has not LED to action uh again it's forecasts are uh difficult when they involve the future we don't know what the future will bring but two and a half years of History suggests that mainly what we're seeing is talk rather than action because moving away from the dollar is costly and not that attractive when there aren't a lot of um appealing alternatives to the green back for for use in crossb transactions out there all the questions I have for you thank you very much Professor where can we follow your work read about uh your well you have a book that I mentioned earlier um do you have any other upcoming works that we should be aware of no but i' en encourage your readers to look at my uh Amazon page or my books on Amazon to look for me on Twitter and to look for me at project Syndicate okay we'll put the links down in the description below so make sure to follow Professor I green down below Thank you very much for your time very educational thank you thank you David thank you for watching don't forget to like and subsscribe

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Length: 41min 11sec (2471 seconds)

Published: Mon Apr 29 2024