March 8, 2010

IN FACT....:

Is There Too Much Worry About the Debt? (Zachary Karabell, 3/15/10, TIME)

But what if the real problem isn't too much debt but too much anxiety about debt?

Let's take a closer look at the numbers. The amount the U.S. pays to service the national debt isn't particularly onerous. In fact, interest payments in 2010, which so many have touted as approaching $500 billion, are not much different in inflation-adjusted terms from what servicing cost 20 years ago, especially relative to GDP. The same is true for household debt, which has shot up astronomically in sheer dollars but consumes about the same percentage of household income to service as it did in the 1990s.

The reason we can afford such large debts is that interest rates are so low. At the beginning of 2000, it cost the U.S. government more than 6.5% to borrow money. Now it costs less than 2.5%. That means we can borrow 2½ times as much today for the same cost. Also, the overall economy has expanded dramatically, and relative to the size of the economy, the debt isn't particularly high by global standards. (See pictures of the global financial crisis.)

The concern, of course, is that one day rates will inevitably go up, which means interest payments will too. According to this school of thought, as our debt grows, lenders will be willing to take the risk of giving more money only if they can get more in return. And yet with the rise of China, India and Brazil, the world is awash in money looking for safe places. Even with the U.S. economy weak, the dollar remains one of the few truly safe havens, and that means interest rates could stay low for a very long time, which in turn means that our debts — however big — can be managed.

Indeed, though eliminating deficits might seem wise, it could actually be fatal to future prosperity

...our debt may be far too low to serve as the safe haven the rest of the world economy requires. That was former Chairman Greenspan's worry when it looked like we'd start paying off the debt.

Posted by Orrin Judd at March 8, 2010 6:36 AM
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