A Grumpy outlook on the debt

John Cochrane writes,

The danger the US faces the danger we should repeat and keep in mind, is a debt crisis. We print our own money, so the result may be a sharp inflation that wipes away the value of debt rather than an even more disruptive default, but the consequences will be almost as dire.

Read the whole essay. The counter-argument, which the market clearly accepts, is that the inflation-worriers have been with us for decades, and inflation has only trended down. Please do not repeat that argument in the comments. To me, it is the classic case of jumping out of a 10-story window, and as you pass the 2nd floor saying, “See, it’s all fine so far.”

In a subsequent post, Cochrane writes,

The main worry I have about US debt is the possibility of a debt crisis. I outlined that in my last post, and (thanks again to correspondents) I’ll try to draw out the scenario later. The event combines difficulty in rolling over debt, the lack of fiscal space to borrow massively in the next crisis. The bedrock and firehouse of the financial system evaporates when it’s needed most.

Basically agreeing with John, I recently wrote,

for the next several years the Fed will be focused on the task of enabling the government to continue to borrow. The conduct of what economists call monetary policy will be subordinated to that objective. The Fed will be expected to finance as much government borrowing as is necessary to keep interest costs under control. But regardless of how active the Fed is in purchasing government bonds, I believe that the United States will slide into a regime of high inflation.

My previous essays on the topic include How a Sovereign Debt Crisis Might Play Out and Guessing the Trigger Point for a U.S. Debt Crisis. As the latter paper points out, a debt crisis has to come as a surprise to the typical investor. That is why your confidence that there won’t be a debt crisis is not going to persuade me that it will never happen.