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Sat Dec 22, 2012, 07:44 AM


Debt Worries: Why they're overblown

The Washington political establishment has decided that reducing the debt should be the country's number one economic priority...The story that the debt worriers have been pushing is that the ratio of debt to GDP in the United States is rapidly approaching the point where it will seriously impinge on future growth. The holy grail to these people is the work of two prominent economists, Carmen Reinhardt and Ken Rogoff, which argues that growth slows sharply in countries where the ratio of debt to GDP exceeds 90 percent...

While our debt to GDP ratio is approaching levels not seen since the years immediately following World War II, there is another key ratio that has been going in the opposite direction. This is the ratio of interest payments to GDP. This fell to 1.3 percent of GDP in 2009, its lowest level since World War II. While it has risen slightly in the last couple of years, the ratio of interest payments to GDP is still near a post-war low.

Furthermore, even this low number overstates the actual burden that interest poses for the government. Much of the government's debt is held by the Federal Reserve Board. The interest the government pays on this debt is refunded right back to the Treasury. In the last two years, the Fed has refunded roughly $80 billion a year to the Treasury (more than 0.5 percent of GDP), bringing the actual interest burden down to around 1.0 percent of GDP. In terms of the actual commitment of economic resources, it is the ratio of interest payments to GDP that will matter, not the debt.

If this seems like a slight of hand after all the hoopla that we have seen around the debt in recent years, then some more careful thinking can clear matters up.

Suppose that we issue $4 trillion in 30 year bonds at or near the current interest rate of 2.75 percent. Let's imagine that in 3 years the economy has largely recovered and that long-term interest rates are back at a more normal level; let's say 6.0 percent for a 30-year bond. In this case the bond price would fall by over 40 percent meaning, in principle, that it would be possible for the government to buy up the $4 trillion in debt that it issued in 2012 for just $2.4 trillion, instantly lowering our debt burden by $1.6 trillion, almost 10 percentage points of GDP....

Given the recent history, we don't have to ask whether the world's top economists can really be completely out to lunch in their understanding of something as basic as the burden of the debt...


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Reply Debt Worries: Why they're overblown (Original post)
HiPointDem Dec 2012 OP
xchrom Dec 2012 #1
dkf Dec 2012 #2

Response to HiPointDem (Original post)

Sat Dec 22, 2012, 07:49 AM

1. du rec. nt

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Response to HiPointDem (Original post)

Sat Dec 22, 2012, 08:13 AM

2. Wow just wow.


To be so cavalier about the obviously fishy way our Federal Reserve prints money to buy our debt to keep rates low to lower our interest payments. How long do you think we can coast on that little trick?

Love this tweet from Bill Gross:

@PIMCO: Gross: Feds Twist ends more check writing begins 500 billion a year money for nothin no cost to govt.

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