Thread by @ProfJAParker

(1/N)
How bad is the US debt and deficit situation? A Serious Question for Twitter
by
@ProfJAParker
MIT and NBER

Abstract: Debt and deficits are huge and the Fed is hiding funding costs. Is the US already unable to finance itself?

(2/N) The current Federal Debt held by public is equivalent to:
+ 10 years of (non-recession) Federal income tax revenue
or
+ $50,000 per person
or
+ $141,000 per household

(3/N) Even at zero interest rates, could we pay this down with surpluses?
The structural deficit is huge. Last year's deficit, at full-employment deficit was equivalent to:
+ 60% of Federal income tax revenue collected
or
+ $3,000 per person
or
+ $8,300 per household

(4/N ) In the COVID-19 world as of April 24 CBO publication the Federal deficit is projected to be equivalent to:
+ 18.5 percent of full-employment GDP
or
+ $31,000 per household

(5/N) But the government can borrow cheaply, so isn't there a good argument for spending now? This is the flashing red light. The Fed has had to purchase US debt so the Treasury can issue it. The Fed now owns the equivalent of:
+ $33,300 per household
or
+ 20 percent of GDP

(6/N) But the Fed isn't having trouble borrowing, so there is no problem right? Wrong.
The Fed takes in bank reserves to purchase govt debt. Banks fund the Fed at low rates because if the Fed defaults the banks collapse whether or not they have reserves. The risk is not priced.

(7/N) Thus, the important point: the Fed currently can borrow reserves at low interest rates that do not price the risk of US government funding crisis. So they can hide this price in the bond market (with help from people buying based on past returns & for regulatory reasons).

(8/N) So who funds the banks you ask? Good question. Currently we the people do, through insured deposits. We trust the insurance and/or we find it costly and hard to figure out how to invest more safely.
But there is a non-panic-inducing reason for the Fed to be intervening...

(9/N) The Fed & others claim that the Fed is solving "liquidity problems." They do not think they are dealing with solvency problems in the deepest, most liquid financial market in the world.
See:
Liquidity! : bis.org/publ/bisbull02…
Solvency? : johnhcochrane.blogspot.com/2020/04/the-fi…

(10/N) So:
1. The fact that the Fed owns 20% of GDP of US Treasury debt funded by bank deposits is a red flag.
2. But there is a lot of funding that the Fed can continue to tap to buy Treasury debt as long as people believe past returns are a good guide to future performance.

(11/N) We obviously have enormous GDP losses now that cannot be fixed by deficits, & tremendous need for taxes & transfers to support GDP in future. But after squandering it for years, we may have little fiscal capacity. So we have to be very efficient w/ tax &transfer programs.

(N/N) As titled, these Tweets are a question not an answer. The history of countries whose central banks buy their debt is very bad. But these numbers are small relative to Japan. Also: future promises like Soc Sec, govt guarantees, refinancing debt, loops w/ real economy, etc.