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Minyan Mailbag: National Debt



Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.


If you have some time take a look at
this website. I'm just wondering if you agree with the concepts presented in this article regarding government spending, especially the last section.

Minyan John


This is what the last section you refer to said:

"Of course deficit spending increases the national debt. We know that the national debt can safely grow in a growing economy. But no one knows how high the debt/GDP ratio could become before it might have a negative impact on the economy. It has been much higher than it is currently without acting as a drag on the economy. Indeed studies of the historical record show that higher values of real deficit as a percentage of GDP have been associated with more rapid growth in the real output of the economy."

The comments made in this article are "sterile": they seem unoffending and neutral and therefore have the effect of being disarming. The basic premise, that past talk of high debt has led to no sustained financial crises, is proof that those that have issued such warnings (like Buffett and Volder) are alarmists.

The author is not literally lying; the national debt has been higher before relative to GDP. I believe the only recent time was under Reagan (he eventually raised taxes as a result) and the time before that was the Civil War.

But we cannot look at the national debt in a vacuum as the author would have us do. We are now experiencing near record public deficits in addition to record consumer debt. What is important then is that total debt. Total public and private in this country is now past 300% of GDP. This number is far past any precedent.

The U.S. has been able to run large external and internal deficits farther than other offending countries that have done this (such as Argentina), sending those countries' currency into a tailspin and driving their interest rates higher, because our debt is denominated in dollars and we have the ability to print them. As the world's currency, countries who hold our debt are caught in a continual loop where to ween themselves off of our debt becomes too painful to do.

The author is right in that we just don't know the tipping point. Most believe that there is none, that the situation can continue indefinitely. I do not.

The process of globalization has led us here. The difference between my much more cautious view (that these imbalances cannot be corrected without a significant credit correction) and others is that the globalization process is, "off kilter," that it has happened too quickly. The logical result of globalization is for poorer economies to raise their standard of living; this is a good thing. If it occurs over long periods of time, richer economies can adjust, grow, and it can be more than a zero sum game. But the rapid occurrance of globalization as a result of a "too easy" monetary policy over the years has resulted in abnormal (by any standard) global imbalances that are de-stabilizing.

Simply put, risk is much higher. And that is what I continue to talk about. Things don't have to implode if the U.S. is willing to sell vast amounts of assets to foreigners to relieve (pay off) these imbalances. Where problems occur is when protectionist legislation stops this process. This is what I am watching for.

Prof. Succo

No positions in stocks mentioned.

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