It seems there are no bad consequences of running a massive public deficit, and therefore, no perceived cost of printing money. Is there a point at which there will be a reckoning of sorts here? What will it look like and when do we expect it to hit?
A reckoning won't happen until another currency usurps the USD as global reserve currency. The timeline of that is up to speculation but taking historical perspective in mind it's a matter of when not if.
There are numerous aspects at play. The first and most important for the next 10-20 years, is the debt interest cost.
That is, the federal net interest payments. You want to look at that as a share of the economy and budget (and actual tax revenue as well).
As a share of GDP that was around 1.8% for 2019. In 1996 it was 3% by contrast, on a much smaller pile of debt. As a percentage of government outlays it was 9% in 2019, versus 15% in 1996.
Most likely the US can safely go up to $40 to $50 trillion in public debt, holding the average interest rate on the debt where it is now, without suffering a severe event.
That's not what will happen however. The Fed will press the cost of the debt persistently lower over time and hold rates low permanently. But but but, I can hear other people say: what about inflation?!? The increasing debt maintenance costs rob the economy of dynamism and growth, and largely prevent traditional consumer inflation from running out of control (this is why Japan couldn't spark traditional inflation, despite low rates forever; they had to forcibly take a hatchet to the Yen to get the result they wanted). You will see considerable asset inflation however, and it'll also show up in many (but not all) commodities. It helps that the other global currencies are simultaneously debasing as well, the US just has to compete with peer fiscal disaster mostly (China, Eurozone, Japan; all three are debt and growth nightmares). The winners will be nations in great fiscal shape that have independent currencies, their purchasing power will soar - they'll become wealthier in real-terms - versus the major currencies over time.
At 1% rates on the US debt, you can run up $60 trillion in magic Fed backed debt and only be paying about the same debt interest we are today. Can they squeeze the debt load down to that average rate? Yep, and they will. Eventually the US will issue debt at zero rates as in Europe, and economic dynamism will approach heat death as in most of Europe and Japan.
That's impossible, to push rates so low on the debt? Of course it's not. The ECB is doing it right now and Japan has already done it. Both of those central banks have monetized far larger shares of their respective economies than the US Fed has so far.
So to answer your question: this can continue for a very long time. 20 to 30 years at a minimum before the US reaches where Japan is at today, and 10 to 15 years before the US reaches where Europe is at. The doom forecasters are going to be persistently very distraught as their scenarios fail to play out (they'll endlessly be baffled by it; the professional economists will be baffled at the lack of traditional inflation, but that's trivially easy to explain).
In several decades, after the US maxes out on how low it can push rates on the debt, then it'll move to the last resort: hatchet debasement of the USD, as in Japan with the Yen. That's when you just start cutting down the population's standard of living in aggressive drops (done to debase the debt; that has to continue until you crawl out from under the debt enough to be able to pay your government bills again (ie until you can afford your welfare state & entitlement obligations again); this is a point where there is no choice, the outcome happens regardless of whether anyone decides to aggressively debase the currency or not). That stage, is in summary simply shifting from eating fat, to eating muscle and bone; you're eating your nation's assets and the value of its output very aggressively, in an almost direct swap to debase the debt.
One sentence you're saying the Fed will "press the cost of the debt...lower...and hold rates low permanently." If I'm reading this right, you're talking about the government rolling over its maturing debt into new debt with lower IR.
Then you're talking about the effect of "increasing debt maintenance costs" -- but if the Treasury gets to sell low-interest debt to pay off high-interest debt, isn't that going to decrease its debt maintenance costs?
> The increasing debt maintenance costs rob the economy of dynamism and growth
Hold on a second, I thought we were talking about Treasuries? How does that affect the the private sector?
I get that private IR usually moves in lockstep with government IR (at a mostly fixed offset representing relative risk levels).
But I don't get why a low IR is bad for business. Don't the low rates stimulate companies to build themselves up faster with cheap borrowed money?
> the lack of traditional inflation...[i]s trivially easy to explain
I think you should read up on Modern Monetary Theory (MMT). There are quite a few people that would argue that printing money is not an issue as long as the debt is held in the same currency you're printing the money with. In theory, you could continue to print enough money to pay off the deficit.
The argument against that is that printing money will cause inflation. While this is true to an extent, it is not always the case. Only about 3% of money in circulation is actually "cash", while the other 97% is credit or a balance in a bank's computer system. Cash + Credit = people's ability to spend. When credit dries up, people aren't able to spend as much. In order to keep the system running the fed can print money to counterbalance the reduction in credit. The amount of money in the system stays the same, it's just that there's more cash and less credit. This is done to ensure that people continue to spend and keep the wheels of the economy turning. Printing money is not always bad.
Also, it's important to understand that while printing adds money to the system, taxes take money out of the system. The taxes the government collects don't actually get recirculated back into the economy. Remember, lots of taxes are paid electronically, which is just a debit on your bank account and a credit on the government's balance sheet. It's not like they're taking your physical dollar bills and spending it again by handing them back out. That money leaves the system and is effectively "destroyed". The government just goes ahead and prints the same amount of money again to balance everything out.
A "balanced budget" means that the government spent or printed the same amount of money that they took out of the system with taxes. While most people would argue this is a good thing, you have to realize that if there's no change in the amount of money in the system, people's wages and wealth effectively remain the same. Inequality can quickly creep in as certain populations of the economy amass more and more wealth. With a balanced budget, it is always a zero-sum game, with a winner and a loser.
By running a deficit (spending more than collecting in taxes), you're raising the amount of money in the system. A rising tide lifts all boats, and so more money in the system means more spending, more jobs, and people earn more. More people can build wealth and live a decent life. Of course, it's a balancing act though. But when done right, it can raise the living standards for all people in a nation.
I'm no MMT expert, but here are some resources I've found to be helpful:
> The taxes the government collects don't actually get recirculated back into the economy.
I don't understand what you mean by this. Sure a small percentage of taxes go towards expenses in foreign countries or to foreign companies. But social security? Medicare/Medicaid? All those defense contractors? The roughly 2 million federal government employees? All those expenses are going straight back into the US economy are they not?
