It's not the end of the world...???

[Hobbery]

My brain actually took a big left turn recently.  That really hasn't happened to me in quite a while... 

OK... try to follow me here...  Often there's a difference between what you think you believe, and what you actually believe.

As recently as 2 months ago, I was convinced that the dollar was going to collapse and the economy was going to crumble on some single day in the near future.  I was pretty sold on this notion for at least 3 years.  I even went through a little "prepping" phase (it was good for me).  I was a Peter Schiff guy... put simply.

But there's a difference between what you think you believe, and what your actions prove you really believe.  This is my 20 year old twin turbo... (it's a money pit)



It usually lives under a cover in my driveway and I really drive a 4 cylinder Toyota pickup.  I have an ongoing LOVE / HATE relationship with this car, but it's mostly love.  It gives me problems all the time, and I think of selling it all the time.

I could only get a few thousand for it BUT  if I actually thought the country was going to collapse soon, and gold and silver were going to sky-rocket, I would sell that car and buy gold with it.  Further, the car would be too expensive to drive (it eats gas like a sherman tank) and it would be impossible to sell during a horrible depression.

So it's a no brainer... If I really think the dollar is going to collapse, I'd liquidate the car.  I'd sell all kinds of things I have (I'm pretty sure I have the biggest Robocop gun collection in the world).

...So I don't actually believe it...  That's what I've learned about myself recently. 

And recently, it became time to focus my efforts on saving money and protecting it.  (no more toys)  I've really just started.  So I came to Crawling Road.  More importantly, I put every Harry Browne Investment Show on my ipod and I've blazed through them in the last couple weeks...

Harry screwed my head back on straight.  I re-read the 16 golden rules.  And I'm afraid Peter Schiff, Marc Faber and Gerald Celente don't fit safely within them.  I'm pretty sure Harry even wrote a book on the "coming collapse" a couple decades ago.... It turns out, the collapse is ALWAYS just about to hit!  (Has been for a good 40 years).

I should point out that the math still doesn't look great.  The debt, the unfunded liabilities, the fiscal cliff, the ever erupting middle east don't make me feel good about the economic future ...but 300 million people with a vested interest in keeping this ship afloat is a pretty powerful variable... This can drag on for a loooong time.

I was roped into a mania...  and it just finally stopped.  I was stressing about it!  And it just stopped.  That's probably the best part of Harry's line of thinking.  Namely, you can relax that "constant emergency" part of your brain and just feel protected.  Now I've realized that I'm a slightly different strain of Libertarian than I thought I was.  I might not need that bunker after all... 

A weight has been lifted off of me.  My girlfriend can stop listening to me go on about selling the car or not, and what it means that I can't pull the trigger on selling something I love.  I know now, why I hesitated on the fence. 

This feels right.  I'm going to save enough cash for a job loss or emergency.  Then I'm going to focus on building a nest in a Permanent Portfolio.  And with the rest of the money I can afford to lose  ...ITS GOLD AND SILVER AND AMMO, BABY...!!!
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...Thanks for reading this far.  You guys are great.

Did anyone else here go through a similar "economic doom / eminent collapse" thing? 

[melveyr]

I am 21 and I used to be really scared about the debt. As a young person I am constantly told that America's spending today is bankrupting our nation and there will be nothing left for my generation in the future.

What really helped me was educating myself, drawing from a wide variety of perspectives. There are intelligent people who think the country is going to collapse under the "weight" of its debt, and there are intelligent people who think the national debt is a mere residual of our monetary system. After spending a lot of time with arguments from both sides I was able to decide which one was more grounded in reality.

As it usually is, the doomsday story actually made less sense when carefully examined against the alternatives. I think doomsday stories are popular because if you feel alienated by the system, it is comforting to tell yourself that that the system is going to imminently collapse. If the economy fundamentally doesn't make sense to you, it is more comforting to tell yourself that the world is at fault, not your own logic. Finally, doomsday stories can help one feel less silly when gazing over there the thousands of dollars they have spent on firearms and ammunition.

[Greg]

Hobbery,

You could always say your car is a part of your total assets and try to classify it as either be prosperity/deflation/inflation/recession. My guess is during a deflation would be your best bet for these because during a deflation, perhaps gas prices go down and car companies make less new cars so older car prices appreciate due to demand.

[Pointedstick]

300 million people with a vested interest in keeping this ship afloat is a pretty powerful variable... This can drag on for a loooong time.

I was roped into a mania...  and it just finally stopped.  I was stressing about it!  And it just stopped.  That's probably the best part of Harry's line of thinking.  Namely, you can relax that "constant emergency" part of your brain and just feel protected.  Now I've realized that I'm a slightly different strain of Libertarian than I thought I was.  I might not need that bunker after all... 

A weight has been lifted off of me.

Welcome to happiness and contentedness, friend! I went through the same thing for a year or two. And the collapse just never happened. As you say, having 300 million people committed to preserving the status quo is a very powerful buoyant force on our national ship. In some way things get worse, and in other ways, things get better... just like throughout all of human history.

I for one am incredibly grateful for the internet, refrigeration, on-demand running water and electricity, affordable personal vehicles, low-expense index funds, commission-free ETFs, semi-automatic firearms, T-slot aluminum extrusions, Arduino, Linux, community colleges, online education, 6-figure jobs available to the masses, and many of the other wonders of the modern world. We live in an amazing time!

P.S. http://www.mrmoneymustache.com/2012/03/ ... ople/ 

[doodle]

Did anyone else here go through a similar "economic doom / eminent collapse" thing? 

Yup, and I fought hard here to express my view of the coming collapse. I bought into the whole hyped up Faber, Rogers, Schiff, Celente....we're doomed mentality. At a certain point it became like one of those tantrums that kids throw and then after bawling and throwing themselves around for hours become so exhausted that a certain calmness and clarity starts to come over them. The more I read differing viewpoints and interacted on this forum the more rational and tempered my reactions to the media hype became. Now most of what I read and hear on the news comes across as just pure nonsense aimed not at informing people, but rather getting them all riled up. Heck, the permanent portfolio has even driven me into investigating eastern philosophy. Once you start on this path there is no telling where it will lead you.

[Greg]

Did anyone else here go through a similar "economic doom / eminent collapse" thing? 

Yup, and I fought hard here to express my view of the coming collapse. I bought into the whole hyped up Faber, Rogers, Schiff, Celente....we're doomed mentality. At a certain point it became like one of those tantrums that kids throw and then after bawling and throwing themselves around for hours become so exhausted that a certain calmness and clarity starts to come over them. The more I read differing viewpoints and interacted on this forum the more rational and tempered my reactions to the media hype became. Now most of what I read and hear on the news comes across as just pure nonsense aimed not at informing people, but rather getting them all riled up. Heck, the permanent portfolio has even driven me into investigating eastern philosophy. Once you start on this path there is no telling where it will lead you.

I'm thinking the same way now about the media I watch today and look at everything now with a grain of salt and what their biases are. I went through my Austrian economics phase and feel it just never fully explains the real world. I'm not saying it's not good, far from it; just that other economic philosophies help to fill in the gaps of logic in my mind.

[Hobbery]

You guys really are great. 

But listen... If IF the dollar does collapse and mayhem washes over America... Let's erase this thread and say we were calling it all along!!!



...(that's Captain Hindsight from South Park).

[craigr]

Harry Browne used to say: Anything can happen, but nothing has to happen.

So sure you can prepare for dire situations and there is nothing wrong with that within reason. But I don't want to live my life in fear of the unknown. There is no way to know what the unknown will bring, and you can consume all your time and energy worrying about stuff that will never pan out the way you think it will happen anyway.

I have a couple blog posts talking about the need for investors to be very middle-ground thinkers. Meaning that you can plan for the worse, but also plan in case the worst is a few decades away:

https://web.archive.org/web/20160324133 ... -are-real/
https://web.archive.org/web/20160324133 ... -strategy/

Investing planning should really be future agnostic. I prefer having a toolbox of options to respond to whatever may happen flexibly, rather than a static approach that could get really gutted if the future doesn't work out as planned.

[Benko]

What cannot continue (the US gov't spending more and more money that it does not have) WILL STOP at some point.

Please explain if you disagree.  The only question is what happens then.

[craigr]

What cannot continue (the US gov't spending more and more money that it does not have) WILL STOP at some point.

Please explain if you disagree.  The only question is what happens then.

I agree. But I don't know how it will play out or when. Could be next week or could be in 50 years. So own some gold and preferably make it harder to easily take in a Hail Mary asset grab.

Other than that, keep the other assets invested and rebalance profits as required.

[Pointedstick]

What cannot continue (the US gov't spending more and more money that it does not have) WILL STOP at some point.

Please explain if you disagree.  The only question is what happens then.

The U.S. government is not like an individual, household, corporation, or state. Any of these entities need to balance revenue with spending, but the U.S. government does not because it is the issuer of money within its own borders and also serves as the provider of liquidity to the global financial system. These two unique traits not only excuse it from the otherwise constant necessity of balancing its budget, but they sometimes even require that it does not for a variety of strange reasons.

Think about it: if GDP growth is 5% in some year, then the money supply has to grow by 5% that year to prevent deflation, right? And let's say that the people within that economy also want to save 5% of their income (i.e. remove 5% of the money from common circulation). Now in the aggregate, the money supply has to grow by 10% just to keep up and prevent deflation, right? In a society in which private banks and the government both create money, that means that either banks need to expand lending by an amount equal to 10% of GDP, or the government needs to run a deficit of equal size, or some combination of the two.

You don't have to be a fan of the U.S. government (I'm not) to acknowledge that this is the reality we live in. If the government runs a balanced budget, that means it's entirely up to the banks to provide the money supply in the form of private debt, so it can only grow if people become more indebted to the banks. If the banks ever stop lending for some reason, that can cause deflation pretty quickly.

Will this continue forever? No, but nothing ever does. As Craig said, we don't know if this state of affairs will end next week, or in 50 years.

[melveyr]

What cannot continue (the US gov't spending more and more money that it does not have) WILL STOP at some point.

Please explain if you disagree.  The only question is what happens then.

Some food for thought:

Where do the dollars that buy Treasuries come from? You can only purchase Treasuries with US dollars. US dollars only come from the the US government.

Where does the money to pay taxes for come from? You can only settle you tax obligation with US dollars. US dollars only come from the the US government.

Do you propose that it would be more prudent for the government to tax away dollars to "save" it up before spending at a later date? This makes sense for a household, but does it really make sense for a government that controls its own currency? You are correct to say the government spends money that it doesn't "have." When I sign a piece of paper with my signature I am writing a signature that I didn't "have." Should I save up my signatures before I write them? If other people start hoarding my signatures and I decide I want to give them interest, I could offer them a "Ryan Bond" where if one gives me one of my signatures now, I give them a new note that promises two "Ryan" signatures in year. I have gone into "debt" denominated in my own signature. I will probably be able to sleep just fine, and barring a complete mental collapse I will easily write the two signatures required to pay back the debt.

Final food for thought. The national debt is equivalent to net financial assets in the US financial system. The national debt clock could just as easily read "Government Debt/ Non government Net Financial Assets." For surplus there is a correspond deficit, and for every debt there is the corresponding asset. It would be impossible for the government to run a dollar surplus and have the non goverment not run a dollar deficit. They match each other to the penny. Doesn't it make more sense for the entity that creates dollars to be running the deficit?

When someone says the "Government should run a surplus!" They are also (whether or not they know it) saying that the non-government should be having a deficit. Sometimes It can make sense to push the non government sector into a deficit to reduce their spending power, but I don't think right now is one of those times.

[KevinW]

I think the direct link between the four assets and observable macroeconomic factors is important for behavioral reasons and is underappreciated. It means that bonds, gold, and cash can act as "worry sponges" that prevent an investor from shooting themselves in the foot.

I recall in 2008 some coworkers were liquidating their 401ks to cash and were sincerely worried that their funds would just get lost during the transaction. Remember there was a lot of talk about the interbank cash markets freezing back then. A PP investor would have 25% in T-bills and 25% in physical gold, both of which were practically immune from those problems, which made it a lot easier to ride that out and do nothing. Which in hindsight was the best thing to do.

Similarly, I'm unfazed by the "fiscal cliff" narrative since I'm confident that I'm protected no matter how that shakes out.

And any time I start down a pessimistic "doomer" line of thinking, which does happen sometimes, I remember my gold position and decide I'm OK with leaving everything alone. Which is for the best.

These experiences reinforce that the safest thing is to stick to the plan. Over time it gets easier and easier to stay the course, even as the portfolio grows in nominal terms.

The four-asset analysis and corresponding allocation is a design feature that makes it easier for imperfect humans to stay the course and succeed at following the plan. That feature is valuable and is worth paying for. That's why, even though I grant that gold has 0% expected real returns, cash could be eliminated, and cash and bonds could be merged, I stick to the 4x25. I am willing to sacrifice a smidgen of returns or complexity to maintain this feature.

Harry Browne designed a portfolio that not only works well from an analytical perspective but also from a psychological, behavioral one. I think he was ahead of his time on this count. Most investment plans ignore this aspect entirely, which is nuts IMO. Lifecycle funds were one attempt, but they haven't worked very well.

[Tortoise]

Thanks for sharing your journey with us, Hobbery! Your own transition from anxious doomer to calm PPer closely resembles the one that I went through a couple of years ago when I first stumbled across the PP in a blog post on LewRockwell.com.

Regarding your comment that what we think we believe is often not what we actually believe: You are exactly right. According to the triune model of the brain, we all have a survival/reproduction-focused "reptilian brain," an emotion-based "mammalian brain," and a logic-based rational brain--and they often compete with each other. In the advertising industry, the best marketers are aware that what people say they want to buy and what they actually buy are often not the same thing. In the 2004 PBS Frontline documentary The Persuaders, marketing guru Dr. Clotaire Rapaille pointed out:

My theory is very simple: The reptilian always wins. I don't care what you're going to tell me intellectually. I don't care. Give me the reptilian. Why? Because the reptilian always wins.

Source: PBS Frontline documentary The Persuaders

Wall Street preys off of people's reptilian brains with a vengeance. So does the doomer industry. I think the key to taming your reptilian brain is to make sure your rational brain isn't latched onto an idea that contradicts reality.

If you acknowledge reality--like the PP mindset does by acknowledging uncertainty--and let it guide your thoughts, eventually your rational brain gains more control over your lower-level mammalian and reptilian brains. And then you feel more in control of your life, less anxious, and less vulnerable to manipulation by people who want to separate you from your money.

[Pointedstick]

Oops, you're right, Slotine. However, that cash in a savings account only turns into further actual economic transactions if banks are lending, despite its existence on their balance sheet. The velocity of money needs to be at a certain level or else all the money in bank savings accounts really do represent dollars not circulating. That's why having so much of the money supply be private debt is so destabilizing, in my opinion. Even unbacked fiat would be better than debt-backed fiat!

[melveyr]

Note though he didn't mention default.  You're responding as though he did.

Depreciation is still a valid concern.  The Ryan Bond is increasingly deemed worthless when compared to real assets because there's just too many of them in circulation.  The fact that you 'print' Ryan Bonds at a whim also increases the risk premium on future Ryan Bonds you have to offer.  Owning a printing press doesn't not remove risk of ruin.  It merely masks it in accounting terms.

At the end of the day, it all boils down to a confidence play.  Can I, as a holder of the Ryan bond, be expected to get my real worth of it back at maturity.  If the answer becomes no, either through excessive debt, or excessive austerity, then that will become reflected in the price of the Ryan bond when compared to an outside factor.

I am simply arguing that the US government can spend more than it taxes indefinitely. The constraint is inflation. We need to be precise with our language. Once we have identified that inflation is the true constraint, the next task is to identify how and when inflation would reach a point where it is destructive. Conflating default and inflation is far too common in layman's analysis of the economy.

After all, look at our CPI currently. Prices are not growing at a destructive rate. So are we worried about default or inflation? Well, if we agree that that default is impossible then we are left with inflation. Are we bumping up against a rate of inflation where it is destructive? In my view, no.

[melveyr]

Note though he didn't mention default.  You're responding as though he did.

Depreciation is still a valid concern.  The Ryan Bond is increasingly deemed worthless when compared to real assets because there's just too many of them in circulation.  The fact that you 'print' Ryan Bonds at a whim also increases the risk premium on future Ryan Bonds you have to offer.  Owning a printing press doesn't not remove risk of ruin.  It merely masks it in accounting terms.

At the end of the day, it all boils down to a confidence play.  Can I, as a holder of the Ryan bond, be expected to get my real worth of it back at maturity.  If the answer becomes no, either through excessive debt, or excessive austerity, then that will become reflected in the price of the Ryan bond when compared to an outside factor.

I am simply arguing that the US government can spend more than it taxes indefinitely. The constraint is inflation. We need to be precise with our language. Once we have identified that inflation is the true constraint, the next task is to identify how and when inflation would reach a point where it is destructive. Conflating default and inflation is far too common in layman's analysis of the economy.

After all, look at our CPI currently. Prices are not growing at a destructive rate. So are we worried about default or inflation? Well, if we agree that that default is impossible then we are left with inflation. Are we bumping up against a rate of inflation where it is destructive? In my view, no.

I contend that inflation isn't the only measure or constraint.  The actual constraint is debt to income.  Luckily, income is a positive biased number so in a textbook scenario it can grow forever.  However, because income is also a extremely finicky beast in reality, having more debt exposes you to the risk of externalities as you've exhausted your buffer.

There's unfortunately a positive feedback loop in the forex market as well.  As susceptibility to externalities rises, a greater propensity for speculative foreign exchange attacks exists.

Are you talking about government debt to income, or private sector debt to income?

[MediumTex]

Returning to the OP, after thinking about this topic for a LONG time, I have come to the conclusion that the SHTF scenarios that most people should worry about (if they feel like that must worry about something) are the following:

1. Loss of your job or your spouse's job (if your spouse's income is needed to make ends meet).

2. Illness of you or a loved one.

3. Dysfunction in your marriage (if you are married).

If your employment situation is stable, you and your family are healthy, and you get along well with your spouse, worrying about what the government is doing is sort of like worrying about whether your team is going to win on Sunday.  It's really not worth getting TOO worked up about.

Bear in mind, though, that the media desperately wants you to be uneasy all of the time, because people who are uneasy will stay constantly tuned into news programming because they imagine that it will tell them something to help them feel less uneasy (even though the opposite is true).  They usually don't realize that the whole purpose of the news is not to convey valuable information, but rather to keep people frightened, frustrated and powerless to the greatest extent possible.

You know how a good TV show will make you feel like you MUST watch the next episode?  The news follows that same formula.  It is the ultimate reality TV show, and it is every bit as dumb and cynical as anything you might see on Hot Housewives of Houston or Jersey Shore.

[melveyr]

I contend that inflation isn't the only measure or constraint.  The actual constraint is debt to income.  Luckily, income is a positive biased number so in a textbook scenario it can grow forever.  However, because income is also a extremely finicky beast in reality, having more debt exposes you to the risk of externalities as you've exhausted your buffer.

There's unfortunately a positive feedback loop in the forex market as well.  As susceptibility to externalities rises, a greater propensity for speculative foreign exchange attacks exists.

Are you talking about government debt to income, or private sector debt to income?

Mainly government debt to income.  Although the ability to increase taxes also factors in, so private sector debt to income comes in as a secondary factor from there.  Private debt load is less one-to-one as political friction determines a big part of how much 'extra' you can extract.

An increase in government debt corresponds an to increase in nominally risk free interest income flowing towards the private sector. That will add to aggregate demand, and if people are attempting to demand more than what is for sale prices will go up. That is what you are ultimately worried about correct? I believe we have already dismissed outright default.

I think that aggregate demand is simply so weak right now relative to our economy's productive capacity that I don't think we are close to a severe inflation. We have so many firms who would jump at the opportunity to produce greater quantities and we have so many laborers ready to jump back into the market, but the demand just isn't there . These players will have to be exhausted before inflation becomes truly destructive. Until then, adding more interest income will simply boost aggregate demand and push us closer to our potential GDP.

[melveyr]

Returning to the OP, after thinking about this topic for a LONG time, I have come to the conclusion that the SHTF scenarios that most people should worry about (if they feel like that must worry about something) are the following:

1. Loss of your job or your spouse's job (if your spouse's income is needed to make ends meet).

2. Illness of you or a loved one.

3. Dysfunction in your marriage (if you are married).

If your employment situation is stable, you and your family are healthy, and you get along well with your spouse, worrying about what the government is doing is sort of like worrying about whether your team is going to win on Sunday.  It's really not worth getting TOO worked up about.

Bear in mind, though, that the media desperately wants you to be uneasy all of the time, because people who are uneasy will stay constantly tuned into news programming because they imagine that it will tell them something to help them feel less uneasy (even though the opposite is true).  They usually don't realize that the whole purpose of the news is not to convey valuable information, but rather to keep people frightened, frustrated and powerless to the greatest extent possible.

You know how a good TV show will make you feel like you MUST watch the next episode?  The news follows that same formula.  It is the ultimate reality TV show, and it is every bit as dumb and cynical as anything you might see on Hot Housewives of Houston or Jersey Shore.

When you look at the personal SHTF risks that are most likely to affect you, it's interesting how many of them can be addressed with insurance products and strong relationships.

[RuralEngineer]

I don't have any guns buried in my yard and my house is entirely above ground.  I'm not a doom and gloom prepper, but I understand their thought process a lot better than I can the people who take the position that "it hasn't failed yet, it won't fail in the future."  I find this attitude strangely at odds with a financial philosophy that is founded on the idea that predicting the future based on past events is impossible.

Pointing out that the U.S. government can print its way out of any financial obligation is fine, but there never seems to be any focus on the consequences associated with doing that extensively.  Hyperinflation is a real issue with a historical record.  It's also outright theft committed by a poorly run government on the savings of its citizens.  Some money supply growth may be necessary to keep pace with GDP and population expansion, but growing the debt at a rate in excess of GDP growth is not indefinitely sustainable.  I don't know how likely it is, but the risk of hyperinflation and the dollar losing its status as the worlds reserve currency is real.  It's happened before and will happen again, eventually.  Being worried that the stupidity of our leaders will hasten the arrival of that day is not unreasonable.

[Greg]

An increase in government debt corresponds an to increase in nominally risk free interest income flowing towards the private sector.

Does this only work if the U.S. is the primary holders of Federal Debt? I was looking at this old article from Jan. 2012 on a pie graph of the U.S. Federal Debt

http://www.american.com/archive/2012/ja ... than-debt/

It shows that only about 31.4% is owned by people other than the U.S. Federal Government, the Fed, or U.S. Public.

Once this starts swaying more towards foreigners holding more debt would it not be true that a government deficit is the private sector surplus? I suppose it still would be but we'd be paying then more money out to foreigners in terms of interest so more currency is leaving U.S. hands. Pretty much, we would experience less of the public deficit private surplus for ourselves and share that with foreigners.

[Greg]

The evil part of me though, wonders what would happen if everyone else decides to peg their currency to the US.  You cannot depreciate if you're fully pegged

Wouldn't this be in effect like we were on the gold standard again? Where we lose that ability to modify our monetary policies? Although this time I suppose it would stick because when under the gold standard, we could break from it when we wanted to. If every country pegged to us, we can't say to all of them to break and have them do it (without coercion that is) so we can buy what we want then/devalue more/deficit spend/etc.

[melveyr]

Mainly government debt to income.  Although the ability to increase taxes also factors in, so private sector debt to income comes in as a secondary factor from there.  Private debt load is less one-to-one as political friction determines a big part of how much 'extra' you can extract.

An increase in government debt corresponds an to increase in nominally risk free interest income flowing towards the private sector. That will add to aggregate demand, and if people are attempting to demand more than what is for sale prices will go up. That is what you are ultimately worried about correct? I believe we have already dismissed outright default.

I think that aggregate demand is simply so weak right now relative to our economy's productive capacity that I don't think we are close to a severe inflation. We have so many firms who would jump at the opportunity to produce greater quantities and we have so many laborers ready to jump back into the market, but the demand just isn't there . These players will have to be exhausted before inflation becomes truly destructive. Until then, adding more interest income will simply boost aggregate demand and push us closer to our potential GDP.

You're describing a 100% closed system.  But no developed country is.  Each issuance of new debt is an earmark on the future productivity of the country.  Just like your Ryan Bonds, issuing more coverage than you can reasonably sustain will depreciate the value of that debt when there's some external measure of comparison.  There's an example in the Principles of Macroeconomics (N.G. Mankiw) of what I mean.

Critics of budget deficits sometimes assert that the government debt cannot continue to rise forever, but in fact it can.  Just as a bank evaluating a loan application would compare a person's debts to his income, we should judge the burden of the government debt relative to the size of the nation's income.  Population growth and technological progress cause the total income of the US economy to grow over time.  As a result, the nation's ability to pay the interest on government debt grows over time as well.  As long as the government debt grows more slowly than the nation's income, there is nothing to prevent the government debt from growing forever.

Some numbers can put this in perspective.  The real output of the US economy grows on average about 3 percent per year.  If the inflation rate is 2 percent per year, then nominal income grows at a rate of 5 percent per year.  The government debt, there can rise by 5 percent per year without increasing the ratio of debt to income.  In 2008, the federal government debt was $5.2 trillion; 5 percent of this figure is $260 billion.  As long as the federal budget deficit is smaller than $260 billion, the policy is sustainable.

Sustain that increase in debt/income long enough and everyone starts to price in your inability to pay back real terms. 

Free-floating exchange rates do act as a reasonable release valve for deviations in fiscal policy.  They're a loose equilibrium in that your newly depreciated currency tends to improve your export sector, which increases your income, etc etc.  The UK during the ERM is a good example of what happens when the market starts believing you're stuck in an impossible situation of regaining your debt/income balance.  Black Wednesday was the culmination of deficits, recession, and a fixed interest rate.  Luckily, the UK had enough productive credibility to survive it.  I don't think Argentina does.  I think the US does.

The evil part of me though, wonders what would happen if everyone else decides to peg their currency to the US.  You cannot depreciate if you're fully pegged

I agree that everything else held constant a long run elevated debt to GDP versus other alternative currencies could result in depreciation.

But I think it is a little bit harder than that because many foreign countries want to hoard dollars and they use them for their own economies because the dollar is the world's reserve currency. We might have to look at dollar denominated Treasury debt as a % of the dollar denominated economy.

Another complicating factor is that your example of higher debt to GDP resulting in depreciation is assuming that people's desire to save remains dollars constant. If people's desire to save Treasuries increases, than our economy will have a higher level of public debt to GDP before that devaluation occurs, correct?

[Benko]

I am simply arguing that the US government can spend more than it taxes indefinitely. The constraint is inflation.

How about when other countries lose all faith in the US and what we are doing?

We are lucky that Greece, etc are in line in front of us to make us look...less bad, but the point still stands.  I do understand the fiat money issue (at least someone).