“While some countries deserve to have their creditworthiness doubted, others, including the United States, do not. The United States is not another Greece, and the likelihood of default or any dire consequences from the present run-up of Treasury debt is minimal.
See, this is the argument that is always run. For instance, after WWII it was argued thus.
But what's forgotten is that the post-WWII environment was one of ramping industrial output and thus massive GDP growth. Indeed, during the 1950s we recorded insane growth numbers on an aggregate basis. This, of course, provides tax revenues, which in turn brings the debt-to-GDP numbers into some reasonable resemblance of balance.
But this is no longer true. Now we have massive debt increases and decreasing tax revenues, with no reasonable expectation of 7, 8 or 9% GDP growth to serve as the balance. In other words, the common mantra - "we'll grow out of it" - is bereft of validity this time around because we no longer have the capacity to grow actual output.
We've shipped most of our industrial capacity overseas and that which we do retain - finance, mostly - is parasitic - that is, it exists only by drawing funds from some other productive activity, just as does a tax.
The U.S. Treasury debt is soaring because of a depression, and the budget deficits have been essential in keeping the depression contained, avoiding a disaster worse than the 1930s. During a depression, an economy cannot absorb much if any deficit reduction. History shows deficit-slashing actions during depressions tend to be self-defeating because they so damage the economy that revenue plunges.
It does? Warren Harding would disagree with you. So does history.
Indeed, Harding's "Recession" was extraordinarily deep (reaching 20% unemployment) and deflation was extreme, reaching nearly 15% at the retail and nearly 37% (!) at wholesale levels. Total industrial production fell an astonishing 30%.
Yet in 18 months it was over. The bankrupt were forced to take their medicine and nobody was protected. Interest rates were not tampered with. By 1923 unemployment was around 3% and an astounding 60% production increase had been recorded.
Oh, and did I see the "D" word up there in that cited paragraph? Is someone admitting reality?
"R"s (Recessions) happen because of the mathematical reality of all economic systems where capital can be loaned. Interest requires them - it is a simple function of exponents.
"D"s (Depressions) happen when government can't keep its grubby paws out of an "R" and tries to protect the fools in the economy from their own foibles. This never succeeds in the long run and when the economic forces get distorted to a sufficient degree due to government interference and "protection" of those lenders and borrowers who made bad decisions you build up productive imbalances to the point that the economy is threatened with collapse. Yet even then government interference and intervention is the problem, not the solution.
A high public debt ratio in a high-debt-capacity country tends to shrink rapidly for years after the end of a major war or depression. The conditions presently causing high public debt growth in the United States and other advanced economies are not permanent and will eventually reverse, improving government fiscal situations dramatically.
No it won't. The proof is found in the fact that this isn't three years in the making - the excessive spending and deficits go back to 2003! The same claim - that this would be "reversed" - was made then too, as we were "recovering."
The fact is that it did not happen.
It won't happen this time either, as the jobs are gone and so is the productive capacity, having been sent overseas.
We spent the last ten years producing the illusion of prosperity through credit, which simply pulled forward final demand from tomorrow. But then tomorrow came and we did it again - and again...
If it was just government debt we might be able to get away with this. But it's not. The system is overstuffed with both government and private credit, and as such the "borrow more!" mantra simply won't work. It can't - there is no more credit capacity in the economy.
The 2003 mantra of "low rates and liar loans for everyone" allowed one more extension of idiocy in borrowing - one more "pulling forward" of demand. We doubled outstanding credit during the last decade - about 15% of our so-called "demand" each and every year was in fact false, created out of nothing more than a promise to pay tomorrow.
The "low interest rates" spurred borrowing last time - the reaction was immediate and powerful (if suicidal) - this time it has done nothing, as there is simply no more credit-carrying capacity in the economy.
So the government stepped in and replaced 11% of private final demand with more borrowing as the only able and willing borrower. But that cannot continue forever. Eventually those who lend us capital will discern that we're not going to pay, as that actual private final demand will not recover.
This is in fact precisely the same recognition that led to Greece's problems, and it will come here.
In order to argue the converse - that it will be "ok" - you need to show where we're going to get that 11% of final demand that the government is providing, plus enough additional private final demand to provide a positive actual GDP.
If you can show me how the economy will grow at, say, 15% annually for the next five years, I'll eat part of a page of The Wall Street Journal on Youtube.
That has never happened in the history of Fed Z1 record keeping, and it won't this time either.
Yet that is what has to happen for these "happy projections" put forth in this article to occur.
It's a fantasy folks - pure and simple.