The chronic misunderstanding of our National Debt & the political implications

Adam —

Both Presidential candidates will increase fiscal spending. By virtue of slightly higher spending and lower revenue, Trump’s plan will increase the fiscal deficit more than Hillary’s.

The thrust of higher deficit spending is something I actually agree with too (more below), but I disagree with the resources Trump plans to spend on. The irony is not only that you’re misinformed about the perception/reality gap in his debt plan, but your professed principles should align you with Hillary on this issue.

The national debt is not a problem — not by quantitative, qualitative, contingent, or notional measures. Furthermore, high Debt/GDP ratios are a response to structural demographics.

Do not fall for the convenient lure of lazy, single-variable analysis (e.g. growth is weak or our debt is huge). Politicians only have our attention for so long, so they rarely have an opportunity to discuss issues holistically (e.g. the context of structural demographics’ impact on economic growth & debtloads). That’s being arbitraged by populists like Trump, who either don’t understand the holistic issues or are disenfranchised by the whole truth.

Here’s an important except from my commentary in the below link…

Central banks long-ago reached the limit of their authority, because their only tool is to affect interest rates. Now that much of the developed world’s bond markets have reached negative rates, increasing unconventional monetary policy (e.g. QE/QQE) is pushing-on-a-string — met with diminishing returns at best, and unintended consequences at worst (e.g. $DB).

Plus, to be clear, economic growth in the US is not the Fed’s mandate, it is Congress’.

There’s really nothing wrong with US growth today, but the Fed does need to raise rates. To neutralize the economic impact of rate hikes, there’s only one counterbalance: increasing the deficit. That’s not only the econometric solution, but it’s also now the fundamental one, since real interest rates are negative. The antidote for both is increasing the supply of sovereign bonds, which will feed insatiable demand and reverse NIRP.

Europe & Japan have a similar setup, except their sovereign bond markets have negative nominal rates.

However, most governments are already concerned about ballooning deficits in coming years due to weak interim demographics — like the US’s entitlement liabilities (Social Security & Medicare underfunding). Thereafter, the US actually has a demographic tailwind coming (starting 2018–22), but Europe & Japan have decades of headwinds still ahead.

That all said, ironically, both US presidential candidates will prospectively increase deficit spending.

“Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away...” 👉

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