Sunday, October 21, 2012

Why is the current size of our (US) debt bad?


I've learned a lot in the last four years: The federal US debt is a lot more complex than what can be construed from simple political agendas to demonize debt.

Politically, arguing that the amount of debt that we currently have is perfectly acceptable, seems incongruous where most Americans are, opinion-wise.  Americans see $16T, and think that it is too big; they have been sold on the idea that you shouldn't spend more than you earn; they think that a balanced budget would be beneficial to growth.

The common statement you hear is that, if the US keeps borrowing at the same rate that it currently is, eventually the US will become Greece, if China decides to sell their holdings; that the biggest reason why the US hasn't become Greece quite yet, is that the US Dollar is the de facto currency of the world.

To believe this argument, you thus have to have to buy into a giant leap of faith:

  • Never mind Japan has an enormous debt problem much larger than the US, yet hasn't defaulted;
  • Never mind that nearly all of the EU and most first-world nations have larger debt-to-gdp ratios; 
  • Never mind that, with a central bank, the US can buy its own debt (quantitative easing);
  • Never mind that China's holdings have been dwarfed by Japan's, particularly because Japan's own bonds earn less than the US';
  • Never mind that Greece's number one problem is that it does not have its own currency to float and effect rebalancing of trade;
  • Never mind that if the federal debt is lower than the current size of the Social Security + Medicare + other federal government holdings, then these programs will have to invest in companies in order to grow their holdings and keep up with inflation;
  • Never mind that a balanced budget means that economic swings will become as wild as they were, pre-Depression era politics;
  • Never mind that China can't sell its holdings en masse without seeing its trade surplus with the US disappear.
If you can overlook all those items, then yes, the federal debt as it currently is, is bad.


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