Robert Solow had an Op-Ed in the IHT on a few debt pointers. It seems straightforward enough but it's not entirely right and it's not entirely wrong either. His main bullets are that:
- Of the public debt ($11.7 trillion), half is now owed to foreigners. This part is a "direct burden to future generations" and essentially these foreigners can use the interest/principal etc. to acquire goods and services produced here.
Not entirely sure why this is necessarily a bad thing per se. Increased foreign demand for US goods and services should lead to upward pressure on production and employment. Of course, that depends on what capacity the economy is running at relative to global capacity to consume etc. but you get the point. Solow does make an obvious mainstream (I hope!) point here - that if this borrowed money were being invested in infrastructure or worker skills etc. that would make sense. Wars and Tax cuts? Not so much!
- The Treasury owes Dollars.
As simple as that. Solow's explanation is that the Treasury can always pay interests/principals unless it is held hostage by the law (political impasse). However, if investors really expected a risk of default, the premium would show in the US's borrowing cost. I wish Solow would demarcate the currency-issuing line a bit more forcefully though. Otherwise those "America is the next Greece under Obama" chants from the right might never cease!
- US Debt can be repudiated by encouraging inflation
Naturally, rising prices make the purchasing power of the dollar worth less at the time of paying back than what it was at the time of borrowing. But repudiate sounds wrong because debt (unless you consider TIPS) are nominally denominated and paying on these default securities is practice, not denial. Tricky use of language, I would think. Investors aren't clueless, everyone knows what's happening with the CPI.
- Bonds owned by Americans are different from bonds held by foreigners
Again, the line itself seems shockingly naive but Solow's argument simplified is of ignoring the "burden" of foreign demand. This distinction of debt staying within borders doesn't do justice to the ability of the US treasury to borrow from anyone. An American bondholder could just as easily hoard that cash while a foreigner could demand US goods leading to increased production/employment etc.
The next two interlinked points relate to the crowding-out effect and the impact of budget deficits on private savings and investment. Solow states that if the government wouldn't borrow so much (fewer bonds for sale), investors would seek out corporate bonds/ stocks thereby spurring investment and creating profit.
...but wait!...his caveat is that "in bad times like now"...contrary to that lucid theory, debt-financed government spending adds to the aggregate demand and provides a home for excess saving.
This, I think, is where the sectoral balance sheet approach comes in handy and seems to be conveniently ignored - that a public sector deficit accomadates the private sector mass and rapid deleveraging that we've witnessed.
Thankfully, Solow ends with, "But for now the best chance to reinvigorate the economy, spur business investment and encourage consumer spending is through public borrowing and spending. Instead, we’re heading into an ill-advised, across-the-board austerity program."
Cue one for the anti-austerians.
- Of the public debt ($11.7 trillion), half is now owed to foreigners. This part is a "direct burden to future generations" and essentially these foreigners can use the interest/principal etc. to acquire goods and services produced here.
Not entirely sure why this is necessarily a bad thing per se. Increased foreign demand for US goods and services should lead to upward pressure on production and employment. Of course, that depends on what capacity the economy is running at relative to global capacity to consume etc. but you get the point. Solow does make an obvious mainstream (I hope!) point here - that if this borrowed money were being invested in infrastructure or worker skills etc. that would make sense. Wars and Tax cuts? Not so much!
- The Treasury owes Dollars.
As simple as that. Solow's explanation is that the Treasury can always pay interests/principals unless it is held hostage by the law (political impasse). However, if investors really expected a risk of default, the premium would show in the US's borrowing cost. I wish Solow would demarcate the currency-issuing line a bit more forcefully though. Otherwise those "America is the next Greece under Obama" chants from the right might never cease!
- US Debt can be repudiated by encouraging inflation
Naturally, rising prices make the purchasing power of the dollar worth less at the time of paying back than what it was at the time of borrowing. But repudiate sounds wrong because debt (unless you consider TIPS) are nominally denominated and paying on these default securities is practice, not denial. Tricky use of language, I would think. Investors aren't clueless, everyone knows what's happening with the CPI.
- Bonds owned by Americans are different from bonds held by foreigners
Again, the line itself seems shockingly naive but Solow's argument simplified is of ignoring the "burden" of foreign demand. This distinction of debt staying within borders doesn't do justice to the ability of the US treasury to borrow from anyone. An American bondholder could just as easily hoard that cash while a foreigner could demand US goods leading to increased production/employment etc.
The next two interlinked points relate to the crowding-out effect and the impact of budget deficits on private savings and investment. Solow states that if the government wouldn't borrow so much (fewer bonds for sale), investors would seek out corporate bonds/ stocks thereby spurring investment and creating profit.
...but wait!...his caveat is that "in bad times like now"...contrary to that lucid theory, debt-financed government spending adds to the aggregate demand and provides a home for excess saving.
This, I think, is where the sectoral balance sheet approach comes in handy and seems to be conveniently ignored - that a public sector deficit accomadates the private sector mass and rapid deleveraging that we've witnessed.
Thankfully, Solow ends with, "But for now the best chance to reinvigorate the economy, spur business investment and encourage consumer spending is through public borrowing and spending. Instead, we’re heading into an ill-advised, across-the-board austerity program."
Cue one for the anti-austerians.
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