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Notes -
Fixing Social Security is neither easy nor sufficient to solve the problem.
If we cut the SSA budget by 20%, we'd save $320 billion in 2025. The deficit is projected to be $1.8 trillion.
But even this modest victory is a pipe dream. The political situation in our country prohibits reducing Social Security at all. Our best bet is to fudge the CPI numbers and inflate away the problem. (We've actually been doing a pretty decent job at that).
The trouble with inflating away excessive social security payments means you're also inflating away debt repayments ... and maybe you can gaslight grandma into thinking she's getting a fair deal, but you're not going to pull one over on quants managing trillions of dollars of investments.
From a moral standpoint, it does seem like an improvement to stiff all T-bill owners rather than just grandma. If we were rolling over the debt every 30 years, gently inflating it away would seem to be a tolerable solution. "Aw, you loaned someone disposable income under the impression you were going to get to force their kids to pay it back with interest? Here's some monopoly dollars, and be thankful you're getting that."
But from a practical standpoint ... we're not rolling it over every 30 years. Something like 15% of federal debt is 30 year loans; more than that is one-year loans. And between the one-year loans and the older debt maturing in the same year, we need to roll over something like 9 trillion a year these days, at interest rates that are going to go up as inflation rates do. As soon as we find it too hard to refinance that 9 trillion (because cranking up inflation is when prospective reinvestors realize the game of musical chairs is now ending), the only way to bring it to levels we can repay will be very-non-gentle inflation.
That's a feature not a bug. And quants won't be able to stop it. Here's why.
The Federal Reserve owns a decent chunk of the debt. They don't care if it gets inflated away. In fact, they prefer it.
We just had an episode of inflation in which the debt got inflated away. Bond holders took a bath. Debt/GDP declined from 130% in 2020 to 122% today, despite near-record deficits: https://fred.stlouisfed.org/series/gfdegdq188S
Many institutions are required to hold T-bills. They will have no choice but to accept a soaking.
As recently as 2022, investors were loaning money to Germany at negative interest rates. Not all investors are rational.
It's possible that private investors will simply stop buying debt entirely and the Federal Reserve will take it all. This is exactly what has already happened in Japan. MMT will sneak in through the back door.
I am not claiming that this process will not come with significant disruptions, but it's the only way to avoid default.
Unfortunately, a world where we're comfortable paying for things by printing dollars is not healthy either. Congressmen lose all sense of scale that is created by forcing oneself to compare to revenue taken in and get used to printing more money. We don't want to be Argentina (or take your pick of reckless country).
Regarding 3, will that result in black market or foreign institutions trying to do the same things without the T-bills?
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