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>So as long as the assets of the world make enough to service the interest on the debt things will keep chugging along. The real problem I suppose is how much of the world has to work to service the interest bill.

I worry that this is the case. Our best economic leaders have been wrong(or told to do wrong policies for political reasons for ~200 years).

Tasty candy today can spell a stomach ache later. Given the numerous times our grandparents generation has pushed off problems, I wonder if government debt is a short term political win, with long term ramifications(looking at Japan).

Real interest rates after inflation vary from negative (parts of Europe) to much more than 1-2%.

As long as real interest rates remain negative, it is clearly self-sustained.

Countries that control their own currencies can always negate all debt by printing money (through fractional easing).

However, if inflation starts to increase again, printing money is only a short term solution if there is a budget deficit. If the budget is run at a deficit in a high inflation scenario, printing more money will cause Venezuela style hyperinflation.

In the case of the US, it would be interesting to see how the government would react if the dollar was put under this kind of pressure. Early austerity would result in mass unemployment and heavily slashed welfare. Looser policies would create high inflation, cutting savings by half or more and also collapsing salaries for public sector employees.

Hopefully, the US would be able to avoid hyperinflation, but with the current tendency towards populsm (on both the left and the righ), I don't feel so sure anymore.

I think hyperinflation is best understood as a forex phenomenon: since you can't print foreign currency, if your economy is importing much more value than it exports (including FDI!), then the value of the local currency declines relative to the rest of the world and you end up with hard currency shortages and people handing over increasingly large bundles of notes to pay for hard currency.

Normally the commodities which cause this problem because they have to be imported no matter what the price are the global staples: oil, food, pharmaceuticals.

So you'd have to ask exactly how the US could get into this state. It exports all three of those staples. It's a major inward investment destination. It's the owner of the dollar, widely recognised everywhere else as "hard currency". It would take extraordinary mismanagement to lose those advantages.

Venezuela's dire situation is mostly because its oil industry has been chronically mismanaged and production has collapsed. One consequence of this is that oil is being imported (bought at global prices in dollars) and sold at local pre-collapse subsidised prices (in worthless Bolivars).

Similarly Zimbabwe's collapse was mismanaged "land reform" expropriation of profitable agriculture, and Weimar Germany was ruined by the need to export gold to France for reparations.

Well, hopefully US institutions will be able to prevent mismanagement at the level of Venezuela or Zimbabwe.

But imagine the following scenario: 1. Some left- or right- wing populist (worse than Trump) is president, and is backed by congress. 2. A 1929 size crack hits the market. 3. The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes. 4. The market for US treasuries collapse, making them almost unsellable. 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt. 6. Inflation follows the money supply increase, and then some. 7. Massive strikes/protests hit the country as purchasing power for imported goods and goods created from imported materials. (Think French yellow shirts x3) 8. The government caves in, and increases wages by decree to match the inflation.

(Repeat steps 5-8 ad infinitum)

What would the inflation be after 5-10 years of such policies? Probably less than 1000%, but quite possibly more than 20%

4 is a really big stretch - what's safer to put cash in?

5 essentially already happened with QE

7 Americans don't really do this on any scale

And finally.... 20% inflation is hardly a nightmare. The US hit 14% in '79. The only thing that can take it back there is an external oil shock.

4 : Confidence in a currency lasts until it is gone. After it is gone, so is the feeling of safety. When the feeling is gone, the strength of the currency can only be defended by tight fiscal policies.

Edit: Just to clarify. Other currencies exist, some may be seen as safer than dollars if a populist government is wrecking the economy there. Also, there is always stocks, real estate, precious metals and possibly crypto.

5 : Yes. So next time the expectation will be that it is ok to do this. Which it is, until the time that confidence is lost.

7 : Watching from the outside, America seems to be radicalizing, as is the rest of the West. New generations no longer seem to understand the risks of fascism or socialism.

And finally, I agree, 20% is not necessarily a nightmare. But keep in mind that the US had general growth exceeding the inflation in 79. UK, for instance, had stagflation, which is quite a bit more demanding. In order to reign in the inflation, fiscal tightening is a necessity, or the inflation may become permanent.

> 20% inflation is hardly a nightmare. The US hit 14% in '79.

Er, ’79 was widely regarded as a nightmare, and inflation was a huge part of the reason. ’79 was the center of the “night” implicitly referenced by Reagan's “Morning in America” reelection image that contrasted the time after his election to the time immediately preceding.

> The only thing that can take it back there is an external oil shock.

An economic shock, but no reason it would have to be an external oil shock (in fact, the US is more resistant to that particular kind of shock than it was in the 70s.)

> What would the inflation be after 5-10 years of such policies?

5-10 years of a combination of #1 would have results that would make inflation the least of most people's concerns. (Also, somewhat implausible; even Trump has had problems with a same party Congress while he had it.)

> The deficit is increased to 2B/y, following the doctrines of most populists due to stimulus policies combined with reduced tax incomes.

The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase.

> 5. Fed buys all treasuries, both the ones needed to cover the deficit and to roll over existing debt as well as rotten private sector debt.

So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress?

This scenario is increasingly implausible.

> 8. The government caves in, and increases wages by decree to match the inflation.

What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job.

It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems.

> (Repeat steps 5-8 ad infinitum)

Yeah, that's not going to happen as infinitum. If you get through 8 once (which you won't), government collapse and/or civil war are imminent.

> The budget deficit for FY 2018 was $779B, or over $2B/day. It can't “increase to $2B/year”, that would be a ~99.75% reduction, not an increase.

Thanks for pointing this out. It should be 2T of course, in US units.

> So, populists supporting the radically insane President have taken over the Fed (enough to direct the FOMC consistently, even though that body consists of a mix of the Board of Governors—wih staggered 14-year terms) and a rotating subset of the Reserve Bank Presidents (who are elected by each Reserve Bank’s directors, who largely come from the banking industry?) as well as Congress?

> This scenario is increasingly implausible.

QE was used after 2008, and there is a perception that this is not a problem. Hopefully you are right, and the Fed would be able to resist demands to continue QE into hyperinflation.

> What now? It can increase minimum wages by legislation, sure, but if it does so to match runaway price inflation not driven by output gains, it just kills employment, which breaks the cycle because no one is going to demand wage increases when they don't have a job.

You are right, it does kill employment. Still, it was just done (to some extent) in France (technically not due to inflation, but due to increased costs of living).

> It can directly employ people at whatever wages it chooses, of course, or try to force employers to retain employees while paying higher wages, but those each have their own plausibility problems.

Populist governments all over the world have been using both approaches for a long time.

Anyway, the above is a perfect storm scenario. It is not happening tomorrow, but requires 3 trends to continue, probably for 10 years or so:

A: A continued move towards more populist leaders in both parties.

B: A continuously increasing pubic deficit

C: A major worldwide economic crisis as a trigger.

Edit: C is not a trend, only a trigger.

And even then, responsible institutions may be able to step in and limit the impact to a 1929-like event. But if not, the US may head down the same path as Argentina or Brasil.

>so if the debt keeps increasing and the interest rates go up then things will turn nasty.

Or what happens when something like the Tunguska event happens over NYC or London or Tokyo and you suddenly have 500 billion or a trillion in damage including mass casualties and likely hundreds of thousands of dead.

Then what? You just lost a tremendous amount of value and the ability to generate a very large amount of income and probably just completely lost some companies and private individuals that owned debt.

Or if not an asteroid/comet/meteor, what if it's a hurricane barreling right into NYC or 'the big one' hitting one or major cities in California or an Asian city on the ring of fire?

>everyone could liquidate and have some money left over.

Problem with that though is real estate. Real estate in NYC alone is worth something like 1.5 trillion dollars. I imagine at least 10% of that total wealth of the world is just in the real estate in a dozen or two cities. And what happens when global warming leads to flooding of the land of many coastal cities, in fact 14 of the world's 17 largest cities are located along coasts so in 10, 50, 100 years when some of those cities have either had to expend huge amounts of money finding a geoengineering solution, or have been abandoned and are now flooded, what happens with the debt that still exists? Are companies, are people, going to keep servicing loans on property underwater? Are they going to be able to move their manufacturing without taking on large loans at potentially unreasonable rates?

Debt often lasts several decades and we now live in a world where drastic events can happen in days or weeks. 1 nuclear weapon can effectively destroy a city (even if it doesn't outright level the city, the economic implications of even a small nuclear detonation would be catastrophic for the host country at a minimum), single storms can severely impact the lives of millions, a single volcano can displace millions of people for days or weeks like when Eyjafjallajökull erupted in Iceland in 2010 and resulted in a 6 day travel ban that canceled 95,000 flights.

The more debt the world creates, the higher the risk of failure increases by nature but it increases even quicker in the 21st century when there are extreme buying fads and trends, destabilizing climate, weapons of mass destruction.

Not ridiculously naive but probably a simplification. The devil's in the detail really. Very large debts can be stable especially if they are in the local currency and the government will help out if banks are a bit over leveraged such as in China so far. Things can go very wrong in other circumstances such as borrowing in a foreign currency followed the local currency crashing, eg Argentina, the Asian financial crisis.

Seems sensible - worth noting that who owns the debt will be an increasingly important political issue