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How Large a Debt Level Is "Worrisome?"

Tuesday, 21 September 2010 04:44

Most newspapers make an effort to separate their news reporting from their editorial pages: not the Washington Post. It routinely uses its news pages to push the economic agenda favored by its editors.

Today it told readers that "the national debt is soaring to worrisome levels." It is not clear why anyone who understands economics would find current debt levels "worrisome." Since the debt is being incurred in a context where the economy has vast amounts of idle resources, current deficits pose no real burden on the economy. If the deficit were smaller, the economy would be smaller and the unemployment rate would be higher.

In contrast to the Washington Post, financial markets do not find the government debt the least bit worrisome. They are willing to buy long-term government debt at interest rates below 3.0 percent.

The debt also need pose no burden in future years. There is no reason why the Federal Reserve Board cannot simply buy and hold the bonds issued to finance the debt. In this situation, the debt accrued in these years will impose no additional future tax burden. The interest on the debt will be paid to the Fed, which will then rebate it to the Treasury.

In ordinary times, this approach would lead to inflation, however this is not a problem in the current situation. In fact, most economists agree that a somewhat higher inflation rate would be desirable at the moment. (The Fed is currently buying large amounts of government debt, although it is expected to resell these bonds at some future point.) If the Fed were to continue to hold the bonds it would eliminate most of the deficit problem discussed in this article.

This article relies on no sources who disagree with the Post's editorial position. In fact, the first "expert" cited is Robert Bixby, the executive director of the Peter Peterson funded Concord Coalition.


Comments (13)Add Comment
written by izzatzo, September 21, 2010 7:38
It was a dark and stormy night, worrisome even, almost balloonish, like a mushroom cloud, flowing from the enemy within like a flood of deficit loans issued by a Sicilian Mafia shark designed to crowd out all legitimate lenders.

Abandon Fony-Fed-Fiat money now. Invest in cotton, the white gold still so valuable to Europe, to be transported in Freedom Ships by the Teabagger Confederate Navy around the Union barricades.

Cotton will never lose its exchange and storage value while providing real jobs for real producers of value during the coming Hyperinflation Apocalypse.
written by Queen of Sheba, September 21, 2010 7:42
There are not enough hours in the day to counteract the fuzzy thinking (I'm being generous, here) of the Washington Post reporting. Practically every newspaper, television news outlet, Republican politician and a good percentage of Democrats are flogging the same message - deficits bad, debt at frightening levels, children and grandchildren's future at risk, government spending out of control.

The general public can not be expected to know any better than to be frightened by this drumbeat of misinformation - after all, economics is not a required course in college, much less high school - but one wouldn't expect overt fearmongering to be in the job description of national news publications and broadcasts. I suppose these media outlets, for whatever reason, just can't help themselves; otherwise I would have to believe no one on their staffs knows enough to write cogently and honestly about the country's economic situation.
written by Ken, September 21, 2010 9:01
Is over $200T in deficits and future liabilities OK? Do you really think that it's safe to extend oneself that much relative to GDP?

Besides, you can't deny the data. Foreign entities are in fact not buying the Treasuries as much as they used to. The "direct bidder" (or is it "indirect" ?) -- whichever one *is* the Fed -- has been consistently buying an increasingly higher share of the auctions. Do you really think that Congress will one day get its budget under control, or is the more likely scenario going to come to pass, that we will just continue to have increasing budget deficits forever. Do you really think that Treasury buyers will be OK with that? All of the CBO projects for tax receipts assume the optimistic guess of increasing productivity, but it's pretty clear that we're not going to have >3% GDP growth for a long time. What about all the underfunded pensions? What about the propping up of home prices and equities through bailouts and Fed open market operations, aka stock market money printing (and thus personal wealth and bank balance sheets), and the shadow inventory of yet-to-be foreclosed homes? And most importantly, what about all the rosy bets, the mountain of OTC derivative contracts, still unresolved, that are just waiting to blow up? Talking about parties and counterparties that consist not only of investment banks, but also cities, pension funds, corporations (BP, for example, extends credit more than ANY bank out there), and governments. Will politicians let these entities fail or will they be able to unwind the contracts somehow?

I think you grossly underestimate the problems that we face. I think you are reading the wrong media outlets!

Meanwhile everyone is going to have faith that the politicians will be able to solve these problems fairly without letting politics cloud their judgement? Seems 100% unlikely to me.

Even if you thought this was possible, you should hedge your bet with a bet for commodities and precious metals. It would be unwise to put all your money on the side of currency system that historically has NEVER LASTED more than 400 years. This time the stakes are much higher since all nations have unbacked currency and are affected by OTC derivatives (which are not traded on exchanges, and are thus not clearable!). It would be akin to the cast of Jackass not buying health insurance.
written by IDIOTS, September 21, 2010 9:40
Enough said!
written by Calgacus, September 21, 2010 9:47
Ken, that's pure scaremongering nonsense. The only thing that could cause those fears to come to pass would be listening to them : You know what the only thing to fear is. If FDR or Harry Hopkins or Keynes were brought back to life and told of today's economic "problems" - they'd die again from laughing at the idea that we have any real problems. 200T is just foolish gameplaying with numbers. You can just as well calculate the amount that the human race will excrete in the next hundred years and conclude we are about to be drowned in a tsunamis of sh*t. Like pay as you go, flush as you go works quite well. Dean is too conservative. It's not clear that "monetizing debt" is seriously inflationary - after all, you're replacing an interest bearing form of debt with a non-interest bearing form of debt - currency. This is just a dogma, like that of the independent central bank. Of course the budget isn't under control. Taxes are much too high and spending is too low. Raise the deficit, and we'll get the growth. Aim for 2% unemployment with government guaranteed WPA type jobs and - keep dreaming, do all the sensible things like destroy the military industrial complex, end our crazy wars, get efficient single payer health care, eliminate drug patent protection, and it would be very tough to keep growth in the single digits, which would easily make all the phony problems mentioned vanish. For 30 years the neoliberals have been working very hard to keep the US and world economy sputtering and coughing and growing slowly, starving ordinary people's incomes and developing nations, and the real sources of wealth like scientific research, so they could have their preferred masters of the universe / lesser people slave world. High time for this dialectic to reverse.
written by Wes, September 21, 2010 10:07
Since the debt is being incurred in a context where the economy has vast amounts of idle resources, current deficits pose no real burden on the economy.

Idiotic. I don't even know why I bother commenting on Dean's writings.
There are much better blogs out there.
I will not bother you any more Dean.
written by skeptonomist, September 21, 2010 10:12
The debt is worrisome, though not necessarily catastrophic, because it has generally been increasing as a fraction of GDP since around 1980. The reason is simple - tax rates have been too low. If the people or their representatives wanted to convert to a more efficient healthcare system, or wanted to terminate our wars and foreign occupations, these and/or many other things could save money and lead to lower tax rates, but these choices have not been made. The idea that higher tax rates would be harmful is absurd, because upper-bracket rates were much higher in the period before about 1980 when the economy was prosperous and debt was decreasing. It is obvious why politicians want to avoid talking about the necessity for raising tax rates, but there is no excuse for economists to do so.
Can the U S of A survive without war?
written by Scott ffolliott, September 21, 2010 11:04
Can the U S of A survive without war?

It seems that the US and UK are the warriors of the neoliberal financial global economy and that enforcing austerity on third world nations is now coming home to these first world nations.

"The tragedy of our epoch is that most credit is extended to buy rent-extracting opportunities, not for productive capital formation. - Michael Hudson
Blatant self-contradiction?
written by JBG, September 21, 2010 12:05
"...financial markets do not find the government debt the least bit worrisome. They are willing to buy long-term government debt at interest rates below 3.0 percent... (The Fed is currently buying large amounts of government debt...)"

I see things like the above over and over in Dean's writings. How can one claim the first statement in the face of the second?
written by Ed Dolan, September 21, 2010 12:55
Your post is overly sanguine on the debt picture. True, in the very short run, the Treasury can issue more debt and the Fed can monetize it, but there is no reason to think that can continue forever. As the economy recovers the Fed will eventually have to implement an exit strategy that will have to include shrinking its portfolio of assets. At that point the burden of interest payments are transferred back to the taxpayer. In addition, unless the Treasury finances all of the deficit now with very long-term bonds, debt issued now will have to be rolled over at higher rates. For a nonpartisan primer on debt and deficit issues, see the four-part "Budget Basics" series on my blog. You can find the relevant links here: http://dolanecon.blogspot.com/...nning.html
Debt is not a problem but unfunded liabilities
written by floccina, September 21, 2010 2:01
Debt is not a problem but unfunded liabilities (like medicare and medicaid)could be a problem because at higher marginal tax rates more wives stop working in the taxed economy and start providing more good and services for in family consumption. Fewer people working in the taxed economy means that taxes have to be higher on those working in the tax economy.

And imagine if the approximate 20% of USA workers in healthcare industry start to vote their interests in a block more than they do today and block any medicare/medicaid reform.
written by diesel, September 21, 2010 3:45
Someone help me out here. What I'm having trouble understanding is why, if Keynes suggested burying money around for people to dig up as a way of expanding the money supply, we couldn't find a way to distribute money to the people who were (are) falling behind in their mortgages. I realize that the wealthy bond holders and loaners will not tolerate any increase in the money supply if they are not given their cut of 5 to 10% for acting as middlemen and that they will not stand by passively and watch the return on their long-term investments eroded by inflationary money policies. But what I don't get is how they can argue that the money created would not be based on or grounded in real tangible goods or services. I mean, the houses are already built. Capital is not being diverted from other more vital investments. There's no crowding out going on. The houses are built and in a sense "paid for". It's simply a matter of transferring money to the poor so they can stay in their homes. If the rich aren't willing to give up some of their slice of the pie, then expand the pie. What am I missing? There's a lack of demand in the economist's sense, but no lack of demand for money. There are millions out there who have demonstrated that they are willing to work for the money with which to buy homes. What is so difficult about seeing the need for expanding the money supply through federal job creation so that these people can buy homes that are already built?
Answer your own question!
written by John Smith, September 22, 2010 7:32
"How Large a Debt Level Is "Worrisome?" "

So what is the answer? At exactly what dollar value does the debt become worrisome? Or does it never become worrisome (because of the slack in the economy blah, blah..)? Do we have to wait until the markets increase interest rates before we know what is (was) worrisome? Couldn't find it in the piece.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.