Friday 31, March 2023

Deficits don’t matter, or do they?

I’m late to the game, but since I have a platform, I thought I’d write something about AI. Well, ‘platform’ is pushing it. More of a wobbly stool but, whatever! I think journalists are obsessed about the technology, because they perceive it to be real, and growing threat to their jobs. Somehow, this threat is more real to them than the threat of overseas factories taking jobs away from people who work in UK factories. If, indeed, there are even any left!

I asked Bard (the Google ChatGPT engine) the following question: “Write a piece about the why the unfunded liabilities of the US Federal government will result in inflation in the coming decades.” This is the answer I got.

The United States Federal government has a large and growing number of unfunded liabilities, including Social Security, Medicare, and Medicaid. These programs are projected to cost more and more money in the coming decades, as the population ages and the number of beneficiaries increases. If the government does not take steps to address these liabilities, they will put a strain on the economy and could lead to inflation.

One way that unfunded liabilities can lead to inflation is by increasing the demand for goods and services. As the number of retirees increases, they will demand more goods and services, such as healthcare, housing, and food. This increased demand will put upward pressure on prices, leading to inflation.

Another way that unfunded liabilities can lead to inflation is by increasing the supply of money. The government will need to borrow money to finance these programs, and this borrowing will increase the money supply. A larger money supply can lead to inflation, as there is more money chasing the same amount of goods and services.

If the government does not take steps to address its unfunded liabilities, they could have a significant impact on the economy. Inflation could make it more difficult for businesses to operate and for people to afford goods and services. This could lead to a recession, which would have a negative impact on everyone in the country.

The government needs to take steps to address its unfunded liabilities. One option is to raise taxes. This would generate more revenue that could be used to fund these programs. Another option is to cut spending. This would reduce the amount of money that the government needs to borrow, which would help to reduce the deficit and the national debt.

The government also needs to make changes to these programs so that they are more sustainable in the long run. For example, Social Security could be modified so that benefits are tied to the rate of inflation. This would help to ensure that beneficiaries are able to maintain their standard of living as prices rise.

The government needs to take action now to address its unfunded liabilities. If it does not, these liabilities could have a significant impact on the economy in the coming decades.

I thought I’d try to get the other side of the story by asking the following question: “Say why deficits don’t matter to the US federal government, even though the costs of Social Security, Medicare, and Medicaid are all going to exceed the ability of the government to raise taxes or to save money by cutting other government programs such as defence spending or overseas aid.” This is what I got:

The US federal government has a large and growing national debt, which is currently over $30 trillion. This debt is the result of years of budget deficits, which are the difference between what the government takes in and what it spends.

There are a number of reasons why the US federal government doesn’t seem to be worried about its growing national debt. First, the US dollar is the world’s reserve currency, which means that it is the currency that most international transactions are conducted in. This gives the US government a lot of flexibility in financing its debt, as it can simply print more money to pay its bills.

Second, the US economy is the largest and most powerful in the world. This means that there is always a demand for US government bonds, even if the interest rates on those bonds are relatively low.

Third, the US government has a long history of managing its debt. Even though the national debt has been growing in recent years, it is still a relatively small percentage of the country’s GDP.

However, there are a number of risks associated with the US federal government’s growing national debt. First, if the US economy were to slow down, it would be more difficult for the government to raise taxes or to cut spending. This could lead to a larger budget deficit and a larger national debt.

Second, if the US dollar were to lose its status as the world’s reserve currency, it would become more expensive for the US government to borrow money. This could lead to higher interest rates on US government bonds, which would make it more expensive for the government to finance its debt.

Third, if the US government were to default on its debt, it would damage its reputation and make it more difficult for it to borrow money in the future. This could lead to higher interest rates on US government bonds and a larger national debt.

Overall, the US federal government’s growing national debt is a cause for concern. However, the government has a number of tools at its disposal to manage its debt, and it is unlikely that the government will default on its debt in the near future.

What I thought was interesting was that Bard has shown itself to be a deficit hawk. If it managed a fixed income portfolio, it would surely be a bond vigilante. I picked the answer which best defended the proposition that “deficits don’t matter” but the nearest I got was basically “they don’t matter, at least in the short term,” which is hardly a full-blooded defence.

You may be wondering how I picked on this subject to ask Bard about. Well, I am interested in the topic, as you are probably painfully aware, but my attention was particularly drawn to the topic because of an interview with Brian Riedl in David Beckworth’s show, Macro Musings. You can read the transcript here, and I’m sure you can follow links on that page to the actual audio version. Riedl’s piece can be read here. Riedl looks like another small-state, libertarian shill, but I think he’s a bit more than that. He was equally critical of both major parties, saying that the promises of both parties to do what needs to be done are not credible: the Republicans to raise taxes and the Democrats to cut spending. This is all very familiar to anyone who has read David Stockton’s ‘The Great Deformation’, or followed Bill Gross. All I can say it that things have worked out pretty well so far for governments with big funded and unfunded liabilities, including Japan, which is still in this game after thirty years.