America Unable to Talk About Debt Without Losing It
Jul 31, 2020168.8K Shares7M Views
Let’s be clear, America has a debt problem. President Obama inherited a significant structural budget deficit (that is, a deficit that occurs even with the economy at full employment) from George W. Bush, which has grown substantially as the economy has weakened and the government has pursued countercyclical policies. Obama’s projected budgets get the deficit back to 2008 levels within a few years, but by that point, the American debt ratio will likely be approaching 100 percent of the gross domestic product — the level of debt that prompted the credit rating agency Standard & Poor’s to cut its outlook for Britain earlier this week.
Now, S&P said that America is in no immediate danger of a downgrade (a 100 percent debt ratio would have to be sustained for for some time to earn such treatment), and Moody’s notedtoday that America’s AAA rating was safe. And while Treasury notes have fallenthrough the week, indicating that markets are worried about the amount of debt the government is unloading on private markets, the latest debt auction — of $35 billion in five-year notes — enjoyedthe highest level of demand in three months.
There are a number of things going on here.
One is that private investors are losing their appetites for government debt — which they ran to in the flight for safety that characterized the past nine months — just as the government is pouring a great deal of new debt into the market. Another is surely rising levels of nervousness among investors waiting to see how large sovereign debts are going to be paid. And a third is the fear that efforts to juice the American economy will lead to inflation. This is certainly a possibility. But the language being used to talk about this possibility is growing increasingly outlandish. John Taylor, for instance, has been widely mocked today for making a basic arithmetic error in arguingthat the threat of a seven percent annual rate of inflation over the next decade is greater than that posed by the credit crisis and current downturn. But Marc Faber takesthe cake:
“„I am 100% sure that the U.S. will go into hyperinflation.
Hm. People seem not to understand that seven percent annual inflation, or 20 percent annual inflation (which would be quite a bit more damaging) do not count as hyperinflation. Countries experiencing hyperinflation, like Zimbabwe, suffer monthly rates of inflation in the millions, billions, trillions, and quadrillions. Really. An American hyperinflation would be impossible without a complete collapse in its governing institutions. Faber may as well have said that he is 100 percent sure America will be seized by a dictator or invaded and left in a state of near-anarchy.
It’s quite fair to worry about how we should pay our debts. But there is not much indication that current monetary and fiscal policies pose a serious threat to future economic health, given reasonable expectations about future economic growth and tax policy changes.
Dexter Cooke
Reviewer
Dexter Cooke is an economist, marketing strategist, and orthopedic surgeon with over 20 years of experience crafting compelling narratives that resonate worldwide.
He holds a Journalism degree from Columbia University, an Economics background from Yale University, and a medical degree with a postdoctoral fellowship in orthopedic medicine from the Medical University of South Carolina.
Dexter’s insights into media, economics, and marketing shine through his prolific contributions to respected publications and advisory roles for influential organizations.
As an orthopedic surgeon specializing in minimally invasive knee replacement surgery and laparoscopic procedures, Dexter prioritizes patient care above all.
Outside his professional pursuits, Dexter enjoys collecting vintage watches, studying ancient civilizations, learning about astronomy, and participating in charity runs.
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