Wednesday, May 8, 2013

It’s the private not the public debt.

Today, I submitted the following as a letter to the Albuquerque Journal without the figure. Perhaps it tries to cover too much ground in too few words. But, once in a while it seems worth challenging a reader rather than just recite slogans, which is all too common in discourse.

Hey, the Journal did publish this on May 20 with the title "Austerity no panacea for U.S. debt crisis."

In his letter to Business Outlook on May 6, Paul J. Gessing took issue with those of us, who realize that federal deficits are inevitable by simple accounting rules as long as the nation runs a foreign trade deficit and the domestic private sector enjoys a surplus. We also understand that “crowding out” is not possible when unemployment is high. Then, only increased government spending or lower taxes will enable the private consumption necessary to restore jobs.

Mr. Gessing missed the point that federal R&D can bring new opportunities to private business as Business Outlook has headlined in recent issues regarding technology at the Los Alamos and Sandia National Laboratories. And, as federal R&D did in development of the space program, GPS system, Internet, weather satellites, and countless other programs.

While deficit “hawks” hyperventilate about federal deficits and debt, they overlook private debt that skyrocketed to 300% of GDP while the national debt held by the public rose to only 70%. Our financial crisis grew not from government spending but from unscrupulous, unregulated private lending. Nevertheless, all the hype is about a “Washington spending problem” while the big banks get a pass and many millions remain unemployed.

The deficit hawks repeatedly warn that someday deficits will cause high interest rates, and we won’t be able to afford interest payments on the national debt.

Having its own sovereign currency, our nation can always make its interest payments, which mostly go back into the economy. And, the short-term interest rate is not a market price but a policy variable set by the Fed. Consequently, the interest rate can be set below the GDP growth rate, which is the criterion for sustainable debt growth.

Unsustainable private debt crashed the economy, and government has the capacity to rescue it. Instead, a deluded Congress and clueless President opt for austerity.

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