looks down the road and wonders how America is going to deal with its epic mountain of debt:
Other countries that have defaulted have not had the option of enacting wealth taxes. When you are in a banana republic with shaky government finances and you have a lot of wealth, you send that wealth over to the United States, where your government cannot get to it. That “safe haven” motive is what keeps the dollar so strong. Anyway, by the time the banana republic gets around to enacting a wealth tax, all the wealth has fled the country and there is nothing left to tax. So the banana republic defaults.
As the U.S. government’s finances deteriorate, it will strengthen its hold on its citizens’ wealth. My guess is that you will see tighter laws that restrict your ability to hide wealth overseas and much more enforcement of those laws.
In a followup post, Kling throws out some other possibilities, and weighs the odds
- Muddle through; debt to GDP remains safe and stable. Odds: 10%.
- Technology (perhaps nanotech) creates a GDP-boosting boom. Odds: 20%
- Major policy change to reduce spending. Odds: 25%
- Inflate away the debt. Odds: 15%
- Hyperinflation. Odds: negligible.
- Default. Odds: negligible.
It appears the numbers don’t add up to 100%, though you get the point.
You might be annoyed with Kling for not being more decisive, though actually we wish more economists would lay out their thoughts this way. It’s far more useful to toss out various ideas, and what they mean, than to try to sound strong and decisive (“The US MUST inflate like crazy!“), which make for good headlines on Bloomberg, but in the end don’t offer too much value.
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