Policy Market Blog

Why is the Debt a Problem?

Martin Kennedy - Thursday, September 13, 2018
  1.  When the Treasury issues bonds, it soaks up funds that could otherwise be used for private investment.  Public borrowing ‘crowds out’ private investment.   
  2. A growing portion of federal spending must be allocated to service the debt.  That portion depends on interest rates which have been kept low, but other things constant…
  3. The primary danger is that it constrains the state.  We’re Keynesians; in downturns we use fiscal policy – tax cuts and / or spending hikes – to stimulate the economy.  Now, with interest rates still low and our debt having grown, it could trickier business to stimulate the economy. 

Running budget deficits increases a nation’s trade deficit.  Economists aren’t particularly troubled by trade deficits themselves, but it seems to bother some folks.  Trade deficits aren't much about ‘lousy trade deals.’ 

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