RI:

Hey, first R1 post so let me know if anything’s wrong. There’s probably a good chance I’m committing some badecon here myself. Anyway, came across this post on r/changemyview and figured it belonged here. So according to this user, the US economy and dollar will collapse within five years. Unfortunate as I’ve been investing all this money in education but hey, at least I’ll sound smart to the other hobos when I hop the boxcar. Anyway, let’s take a look

I am interested to see whether or not anyone on here can give me some information that I do not yet have on this extremely complicated topic. I myself have done many hours of research in my attempt to figure out the truth, and unfortunately all the evidence I have found suggests that a collapse of the world reserve currency (U.S. Dollar) is inevitable

Hopefully I can. Interesting that in the hours of research on the economy this person conducted they never happened upon an economics textbook or looked to economist’s thoughts.

I believe that when the U.S. national debt reaches a critical level, (a level at which the interest on the debt begins to surpass the government's ability to effectively pay it), our lenders (China and others) will stop lending money to the U.S. treasury

Currently the US has the top (or close to the top) credit rating, meaning the US is not likely to default on its obligations anytime soon (especially not in the next 5 years). Also the majority of the debt is not owed to foreign countries so we are not as beholden to China as they would imagine.

The Federal Reserve will then imminently begin printing money and buying bonds in order to keep the government solvent. This mass printing of money will result in hyperinflation creating a situation similar to that of Germany before WWII where people were burning cash to stay warm after hyperinflation destroyed their currency. Unlike Previous currency collapses that have happened in a number of different countries, a collapse of the us dollar will have such a large impact on the world economy, that the world will fall into another great depression. There is a very good video that describes this situation in great detail more effectively than I have here called the day the dollar died

The Fed has avoided hyperinflation for its entire existence and currently operates with an inflation target of ~2%, meaning they would not execute monetary policy that would lead to hyperinflation. The video presented is made by some dude who tries to claim that China has qualms with the US doing quantitative easing, so will stop lending to the US, suddenly ruining the dollar and making gold the only viable option. QE has not lead to a decline in China’s confidence in the US’s ability to honor its obligations and none of what the video predicts (especially the one about the failure of the United States in December of 2012) has occurred. The author of the video also seems to be a promoter for a service that allows people to buy gold, so I would question their standing as an unbiased source of information.

There have been some cuts in spending that have lowered the federal deficit, but when you actually examine the situation you realize that these cuts are all but irreverent to the current situation and there are several reasons why. Let’s start with the simplest reason. All you have to do to get an idea of where we are headed, is to take a look at a nice little thing called The Debt Clock. Here you will see that the current national debt is almost 19 trillion dollars and counting

Just a dollar number is not telling of a country’s ability to repay its debt. Looking at debt relative to the size and health of an economy would be more telling. You could use the debt to GDP ratio for instance. Also debt is not inherently bad for an economy. The US has been in debt for almost two centuries (other countries for even longer) yet has not collapsed. Issuing public debt is useful to grow the economy by investing and spending, especially with low rates, while also acting to stabilize the economy. President of Minneapolis Fed on the topic: https://www.minneapolisfed.org/news-and-events/presidents-speeches/public-debt-and-the-long-run-neutral-real-interest-rate

There is then another section about taxing to get rid of debt I will skip because it mostly goes into politics, not econ (and I’m pretty pumped to cover the next section). Though there is some semi-ok econ (it’s mostly bad but in comparison to the rest) about increasing taxes to pay down debt (in a recession it is poor policy, but that doesn’t mean certain taxes can’t raise revenue to pay down deficits).

Now onto the recession…

What you need to understand is that the "economic improvement" in the last several years has been synthetic. First of all, all that toxic debt from 2008 didn't just disappear. It was absorbed into the public debt through TARP and programs like it. Our government is now paying interest on the debt that was absorbed after the 2008 crash. Not only did the government bail out the privet banking and automotive sectors after the bubble, the federal reserve started a series of massive money printing programs that are still largely in effect today.

Not sure what synthetic means in this sense. Both monetary and fiscal policy were used to counteract the recession, helping to avoid a more severe recession or depression. Growth spurred by stimulus is not ‘fake’ growth and countries that didn’t follow such measures (no rush ECB, take your time) are not fairing as well as the US. Some toxic assets have been purchased by the Fed but I’m not sure what the poster means by “paying interest on the debt.” Some assets have proven to actually be profitable for the government (see: https://www.newyorkfed.org/markets/maidenlane.html). The gov is now paying interest on the reserves held by banks if that’s what they mean, but this is actually good because it is an extremely useful tool in executing monetary policy. It allows the Fed to more easily control short-term interest rates in the interbank market. The user also seems to rail against the bailout, which has been paid back, with interest, in full. The Fed also did not start a “massive money printing program.” The Fed conducted open market operations and then QE. The idea that the Fed has printed money at an astronomical rate that will undermine the economy is false (see: https://fredblog.stlouisfed.org/2014/09/how-much-money-is-the-fed-printing/). There’s then some poor understanding of the fractional reserve system.

In case you think that printing 300 Billion dollars per month is a relatively small amount when compared to the large U.S. economy, you should know about something called Fractional Reserve Lending. Fractional Reserve Lending means that for every 10 dollars the bank has in its vault, it is allowed to create 90 more dollars in its computer system. This means that the bank ends up lending out 10 times the amount that they actually have.

This is not how fractional reserve banking works. The bank cannot just state it has 10 times more money than it has. The bank is required to hold only a fraction of an original deposit in the form of vault cash depending on what the required reserve ratio is. So if someone deposits $100, and the required reserve is 10%, then the bank holds $10 and loans $90 out and this continues, creating the multiplier. But what the poster should be happy to know is that interest the Fed is paying on reserves is actually keeping the multiplier from working as described now that institutions have an incentive to hold cash as reserves and not loan them out to other banks. So fear not!

Because the economic recovery that we have been experiencing has been an artificial one, it must be constantly stimulated in order to be maintained.

Again, not artificial, just helped by good policy. This can easily be debunked though by just thinking about past recessions. The US has faced recessions before and has enacted policy to help the situation. This has not lead to a constant stimulation, things returned to normal. So there’s no reason to expect anything different now.

If the federal reserve stops printing money than the interest rates will increase. An increase in interest rates has an interesting effect on the economy. Rather than crashing the stock market actually goes up. This is due to a number of factors: • After an increase in interest rates, the value of the Dollar will increase due to the fact that the federal reserve will no longer be printing as much money. • After an increase in interest rates, loans from financial institutions will yield a higher profit for lending institutions. In the past this has resulted in a large increase in lending, and subsequently, an increase in the stock market as a whole.

This is neither how the mechanisms behind inflation (deflation) work or how lending is affected by a rate hike. I’d go into how inflation works but this post is getting long enough.