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My apologies if this is a silly question. My background isn't in economics, though wish I had some.

During the 2008-9 financial crisis, federal debt increased significantly and there was a small talk between my friends on how this much debt is unprecedented and the U.S. will collapse unless something is done to reduce it.

It turns out (at least from what I experienced), is that nothing really changed. Debt increased much more now and the economy seemed to be doing fine until COVID-19 erupted.

Recently a stimulus package has been released to alleviate the economy affected by COVID-19. More debt is added and I'm wondering how is the U.S. government just be able to print money without side-effects? (at least for now?)

My understanding back then was that an increase in government debt implies increase in tax but the tax actually got reduced when the Trump administration took charge.

Sources

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  • $\begingroup$ The question in title does not match the only question in text. Are you interested in effects of debt on GDP or monetary policy (“printing money”) $\endgroup$ – 1muflon1 Sep 22 at 8:01
  • $\begingroup$ The time series are of debt levels/ratios. $\endgroup$ – Brian Romanchuk Sep 22 at 11:38
  • $\begingroup$ FRED series GFDGDPA188S shows that in 1946 the debt/GDP ratio was 119%. That one gets updated only once a year. Other FRED series are more frequent. Take series FGSDODNS for 2020 Q2 over series GDP and I get a ratio of 115%. For 2020 Q1 the ratio is 91%. Both numbers are less than the 1946 ratio. $\endgroup$ – H2ONaCl Sep 23 at 21:48
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Rather than have a long comment thread, I will give a partial “answer” here.(Really a direction on how to ask a new question, or what existing questions to search for.)

The first thing to note is that this is a broad question, and hard to answer. The other thing is that answers can easily veer into opinions. Questions of this form are often closed.

The preferred format would be to ask about the linkage of debt levels to one topic of concern. The most common seem to be as follows (“it”=high debt levels).

  • Does it need to be paid back?
  • Does it imply a risk of default?
  • Will It cause GDP growth to slow?
  • Will it raise inflation?
  • Will it cause the currency to fall in value?
  • Will it cause interest rates to rise?

Each one of these is a somewhat complicated question, and it would be best to look at existing questions, and see whether they match your interests.

To what extent I can offer an answer, the safest general statement is that nothing has to happen immediately - Japan providing a data point (or even the US after World War II). Beyond that, you need to ask something more specific, as too general answers turns into opinions.

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Mechanically Congress sets the tax, spend, and credit enhancement policies. Credit enhancements are loan guarantees, backstop of FDIC deposit insurance scheme, and other off-balance sheet promises of the federal government to make payments in the event of contingent future events.

Tax collections go up and down with the state of the economy. Spending and credit enhancements go up and down with the state of the economy. Some spending programs are funded by tax programs. But other spending programs are not tied to any tax programs.

Congress is a rolling body of hundreds of elected officials making policy on a rolling basis. This political body cannot match outlays to collections of funds based on the complexity of government activities.

During an accounting period the various government agencies make federal outlays and collections of federal funds. When outlays exceed collections the Treasury issues net new Treasury securities to cover the deficit. The increase of the federal debt equals the deficit for the period, and the federal debt adds up as the sum of deficits over the history of the nation. These are secure savings instruments which are the asset component of the federal liabilities.

During an accounting period when collections exceed outlays the Treasury retires some outstanding securities to dispose of the surplus.

Mechanically the float of Treasury securities goes up and down via debt management and this debt management effort reduces the otherwise large impact that the federal government cash management would have on the aggregate bank balance sheet. The federal debt has gone up on average over the history of the nation without default. Episodes of inflation or deflation have had to be managed by the institutions organized to do this Congress, Treasury, and Federal Reserve System.

Before 2008 the data show that the Federal Reserve would hold about as much Treasury securities as assets equal to the Federal Reserve Notes in circulation which it issues as liabilities. This policy meant the public had the option to hold either Federal Reserve Notes, which pay zero interest, or Treasury securities, which pay interest, in its portfolio of risk-free financial assets issued by the Fed and Treasury as liabilities. When Fed stuffed the aggregate banking system with excess reserve balances the currency drain would no longer deprive the banking system of necessary reserves so Fed did not buy Treasuries to offset the currency drain after 2008.

Good and bad things happen to individuals in society based on the mix of federal policies, the conditions in private credit markets, the conditions in the real economy, and other sources of cause of outcomes for individuals. The federal deficit spending in combination with the other factors operating as joint causes could produce good or bad outcomes on a wide scale or macroeconomic basis such as listed by Brian Romanchuk.

Because the debt is a public effort to cause good outcomes and avoid bad outcomes, and because individuals experience different costs and benefits based on government policy, the debates over the size of the federal debt are always going to be a political football.

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