Deficit dogma debunked

[xchrom]

http://www.salon.com/2012/04/19/deficit_dogma_debunked/

It’s hard to open a newspaper or turn on the TV without being bombarded with narratives suggesting that fiscal policy didn’t work and that we therefore need discipline in the form of balanced budget amendments and debt limits. Even those who see themselves as moderates on the issue are embracing a commitment to “eventually” slash deficit spending once recovery gets underway.

But most of this talk arises from a fundamental misunderstanding about the way debt and deficits actually operate.

Private v. Public Debt

When people talk about reducing the deficit, the message is that the U.S. government is running out of money. Virtually everyone in Washington accepts this idea—from the progressive think tanks to the nuttiest free marketeers; from the politicians to NPR’s reporters; from Pete Peterson’s hedge fund cronies to organized labor. All present a unified front against budget deficits—particularly those that supposedly result from “entitlements.”

They all warn we have to cut excessive debt. But what kind of debt? Public or private? And excessive in relation to what? Time? Some threshold?

[TreasonousBastard]

1. Sorry, but this guy is so full of shit I can smell it from here...

Really, if government debt was no problem, Greece Spain, Portugal and Ireland would be in great shape-- just keep borrowing your way out of it and watch the good times roll.

The unfortunate truth is that it DOES have to be paid back eventually, and you can't keep borrowing and printing money to cover the debt. That works very well in the sort run, but when the debt starts overtaking the GDP it's all over-- you risk becoming Germany in the early 30s. An old Republican cant was that "we owe it to ourselves so it's OK". You don't hear that much any more, and not just because we don't owe it all to ourselves.

Debt can kill in the private sector in overleveraged corporate takeovers, maxing out credit cards, or just paying too much for something, like a house, but properly used it generates economic activity because you borrow based future earnings or to improve future earnings.

Government borrowing is often considered more like a bridge loan-- getting over the hump while stimulating activity. The problem is when borrowing becomes confused with revenue and becomes a primary source for paying for everyday expenses.

Note that 2500 years ago Plato said democracy was doomed because the voters learn they can get politicians to give them stuff they don't have to pay for.

[sendero]

2. I basically agree..

.. but really it cannot be paid back. So the closest approximation of paying back that can be done without stirring up the hoi polloi is to print, print, and print some more and devalue the currency.

All of the troubled central banks, Europe, Japan, US are printing printing and printing. That printing is keeping the stock market up in the face of not much in the way of prospects, it is keeping the illusion that Greece and Spain and Portugal can somehow work their way out of debt when no such thing is really possible. It is keeping everything in a holding pattern while the Man Behind the Curtain tries to find some kind of real solution.

That printing is why oil prices are skyrocketing. It is why food prices are skyrocketing. And at at some point the inflation caused by the printing becomes more painful than the problem the printing is supposedly addressing.

We are not far from that point right now.