[Vision2020] Our Debt, Ourselves

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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February 27, 2013
Our Debt, Ourselves By ROBERT M. SOLOW

LEXINGTON, Mass.

THE significance of America’s national
debt<http://www.treasurydirect.gov/NP/BPDLogin?application=np>is a
serious question, but you would not know this from the current
political rhetoric, which consists mostly of vague apocalyptic warnings. I
want to present a calmer view, by emphasizing six facts about the debt that
many Americans may not be aware of.

*Roughly half of outstanding debt owed to the public, now $11.7 trillion,
is owned by foreigners.* This part of the debt is a direct burden on
ourselves and future generations. Foreigners are entitled to receive
interest and principal and can use those dollars to acquire goods and
services produced here. If our government had used borrowed money to
improve infrastructure or to improve the skills of workers, the resulting
extra production would have made repayment easier. Instead, over the last
decade, it used the money for wars and tax cuts.

*The Treasury owes dollars, America’s own currency (unlike Greece or Italy,
whose debt is denominated in euros).* So the Treasury can always make
payments when due — unless it is prevented from doing so by political
blackmail over the statutory debt limit, which is now due to be reached in
May. Notwithstanding the unprecedented credit-rating downgrade by Standard
& Poor’s in 2011, no foreign lenders realistically expect us to default. If
they did, they would be insisting on higher interest rates, which they
aren’t. Of course, if we were stupid enough to default even once, the cost
of borrowing would go much higher, for a long time.

*One way to effectively repudiate our debt is to encourage inflation.* When
prices rise, interest and principal are repaid in dollars that are worth
less than they were when they were borrowed. (This applies to Treasury’s
borrowing at home as well as abroad.) The Federal Reserve has promised to
keep buying bonds and to maintain near-zero interest rates until
unemployment eases, a strategy that some fear could lead to uncontrolled
inflation, though there is no indication so far that that will happen.

*Treasury bonds owned by Americans are different from debt owed to
foreigners.* Debt owed to American households, businesses and banks is not
a direct burden on the future. Of course the payments of interest and
principal are a burden on current and future taxpayers, but they will
ultimately be received by American people and organizations, many of them
taxpayers. Some of our grandchildren would be paying off others of our
grandchildren; the result will be a net transfer from American taxpayers to
American bondholders.

*The real burden of domestically owned Treasury debt is that it soaks up
savings that might go into useful private investment. *Savers own Treasury
bonds because they are seen as safe, default-free assets, and the
government can borrow at lower rates than corporations can. If there were
less debt, and fewer bonds for sale, savers seeking higher returns would
invest in corporate bonds or stocks instead. Business investment would
expand and be more profitable.

*But in bad times like now, Treasury bonds are not squeezing finance for
investment out of the market.* On the contrary, debt-financed government
spending adds to the demand for privately produced goods and services, and
the bonds provide a home for the excess savings. When employment returns to
normal, we can return to debt reduction.

In the long run we need a clear plan to reduce the ratio of publicly held
debt to national income. 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.

Robert M. Solow<http://www.nobelprize.org/nobel_prizes/economics/laureates/1987/solow-autobio.html>,
a Nobel laureate, is an emeritus professor of
economics<http://mit150.mit.edu/infinite-history/robert-m-solow>at the
Massachusetts Institute of Technology.




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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