Understanding The Debt
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  • Jacksonian Libertarian

    There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.
    The Government Monopoly is sucking $2 Trillion a year, at the Federal, State, and Local levels, from the Pool of job creating Capital. Had that money been left in the economy, it would have created 5 million $40k a year jobs, 5 MILLION JOBS!
    The Keynesian belief that money Supply isn’t going to be used productively unless the Government borrows and spends it is ridiculous, as Supply and Demand clearly states that price will adjust to balance the Demand. This means that interest rates would drop until all of the Capital is put to work.

  • WigWag

    “Gordon goes on to make the case that Washington’s focus should be on reducing the debt-to-GDP ratio, because, as he says, “It’s the debt’s size relative to gross domestic product that matters, just as personal debts must be measured against a person’s income before they can be properly evaluated”. And reducing the debt-to-GDP ratio requires the government to slow spending, stop adding to the debt, and allow the GDP to grow, thus bringing down the ratio…” (Walter Russell Mead paraphrasing John Steele Gordon)

    The point of view that Gordon espouses and Professor Mead cites approvingly is simple minded.

    While the size of the debt as a proportion of GDP is important, there are other factors that are of equal or greater importance.

    Even more important that the debt to GDP ratio is the cost of financing the debt. The lower the interest rate, the greater the debt that can be financed. In fact, the United States spends less today to finance the federal debt than it spent in the 1990s when the debt as a percentage of GDP was significantly less than it is now. The reason is simple; interest rates are at an all time low and lenders are practically begging to lend money to the government even at miniscule interest rates. It costs significantly less to finance $14.5 trillion of debt at 2.0 percent than it costs to finance a far smaller debt at 5 percent or 7 percent.

    Secondly, the debt to GDP ratio tells only part of the story. Would it be the same thing for the United States to have a debt to GDP ratio of 100 percent as it would be for Greece? What about Zimbabwe or Cuba? To ask the question is to answer it.

    There’s also the fact that the United States gets to borrow in its own currency. Possessing the world’s reserve currency provides the United States with a major advantage; it’s an advantage that doesn’t look like it’s likely to be relinquished soon.

    Finally, with interest rates at near zero making monetary policy almost useless, with growth slowing to a halt and with unemployment high, slowing government spending will inevitably cause GDP growth to slow or even vanish making Gordon’s desire to have debt reduced as a proportion of GDP impossible. Under the current circumstances a reduction in government spending will cause a reduction in GDP growth and the ratio that Gordon finds objectionable will only get worse.

  • Jim.

    Name a great power that has had a debt like ours and not gone into decline…

    – England, after the Napoleonic Wars. It was in an unparalleled position to profit from the peace, industry, and the growth of world trade. Its military might was at the service of its merchant interests, even to the point of going to war with China **three times** to keep the country hooked on opium, because without that the drop in tea excise revenue would have dropped the budget by 1/6th.

    – The US, post-WWII. Of course, we were the only major country with our industrial base and working-age population intact. Also, wartime shortages and thrift had given put the American consumer debt rate at as little as 60% of GDP, meaning US consumers had both the will and the means to drive economic growth.

    Now, we are not the only industrial power in the world. We are not the only intact industrial power in the world. Defense is getting cut, and putting it to use to secure our prosperity is considered too crass to be discussed. Consumer debt levels are at 270% of GDP.

    This “Growth” you speak of. Where is it going to come from?

    We will probably have to reduce this debt by *paying it back*.

    Guess what? That’s a thesis for another War On The Young post!

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