7 replies to this topic

[Zzzptm]

"They must now engineer a way out of that frightful predicament [the huge national debt] without thwarting the nascent economic recovery." - Dallas Fed Chairman Richard Fisher

http://www.dallasfed...11/fs110112.cfm

Basically, if you had to choose between paying the debt off now or having our economic recovery continue, which would you take?

[Magicalbricks]

I strongly beleive that the debt has to be paid off now. A country's debt does three things that can be devastating (amongst others).

First, Government debt undermines confidence. If there is no strong, reliable and credible plan for reducing the debt, both business and members of the public will not have the confidence required to encourage economic growth.

Second, the debt is not the only cost, the interest paid on the debt is incredible. In my own country, the nation debt causes £120 million a day interest payments, this means that we now spend more servicing our debt each year than educating our children. By reducing the debt now, the markets are confident it's going to be paid off and will not charge higher interest rates (as the risk is lower for them) and the quicker you pay off the debt, the more tax receipts can be used to improve our hospitals, educate our children and supporting the disadvantaged.

Third, debt results in inflation and inflation means untold problems for the economy as any modern economist would tell you. (Thankfully Keynesian is as discredited as it should be)


My last point is that I think the title of this topic should read "The Limits Of Government Policy". There is a correct and right time for Government, that time is not running a huge deficit during the upswing of the business cycle and then thinking it can somehow borrow it's way out of a recession when the business cycle goes the other way. It's like a man running a huge credit card debt when times are good, then when he loses his job, his reaction is "I need another credit card"

[Shaunbing]

If I had the choice and could run the british govt, I would tell all the countries that I owe money to, to politely leave me alone they would not be getting the money back and they would have 2 choices. Deal with it, or start a war.


/me thinks this is why I shouldn't go into politics.

[Zzzptm]

Actually, Shaun, that's happened quite a few times in the past... the USA has never had a complete default, but has had partial defaults. Greece has been bankrupt for 120 of the last 200 years...

[Magicalbricks]

Way to ignore my ill-thought through knee-jerk reaction to your thesis.

[Zzzptm]

Sorry, MB...

But, yes, that interest on teh debt is HUGEZORZ.

Also, as governments borrow more, they reduce the amount of money available for others to borrow, so that puts big pressure on interest rates to increase. We are seeing the beginning of that now.

[Magicalbricks]

Crowding out.... a point I failed to mention. I assume macroeconomics is something you find interesting as well?

[Zzzptm]

I teach it. I better find it interesting!

Although... the crowding out will force up interest rates, which would produce deflation. If the Fed's QE2 is an attempt to counter-inflate the economy to prevent that, then they're essentially playing roulette with the nation's treasury. Nobody's done that before... successfully...