Quote:
Originally posted by A Quiet Boom
The Reagan example stated above misses one very important point about those deficits. Reagan ran up the deficit in an effort to outspend the Soviet Union and bring about it's demise, a small price to pay for eliminating the possiblity of a full scale nuclear war and the threat the Soviets placed on the entire world. Deficit spending for national security should not be viewed as bad if it has the desired results.
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Debt is debt, regardless of the goodness or badness of the reason for it.
Whether your family goes $50,000 in the hole to buy a luxury car or to put your kids through college, you are still $50,000 in the hole. Either way, you have to cut spending or increase income, to pay it back.
Same for the USA. Whether we incur $400BN/yr of national debt to fight a war, to drive the Soviets to bankruptcy, or to cure cancer, we are still ballooning the national debt burden, and we have to cut Federal spending or increase tax revenue, to pay it back.
The national debt does matter. Over 12% of total Federal spending goes to pay interest on the national debt (appx $350BN in FY05). The US government spends more on debt service than on
anything else besides Social Security, Medicaid/Medicare, and the military. Most of that debt service is paid to foreigners (increasingly Japanese banks and Chinese government), who hold the majority of Treasury securities. Your and my tax dollars are being sent straight to foreigners.
As the national debt increases, along with Social Security, Medicare/Medicaid, and defense spending, the pressure on every other Federal program will grow.
A country's use of borrowing should be analogous to a person's. When you are young, you borrow a lot (first from your parents, then from banks, student loans, credit cards, etc) because you need to accumulate productive assets (your education, start a business, etc) and your income is small but growing fast. When you are older, your income is larger and still growing well, you repay the debt and start accumulating net savings. When you are older yet, your income growth slows and you use the savings to live and to help your children get their own start in life.
The US is like a 50-year old with a negative net worth, who is still living on credit cards, accumulating more and more debt. His kids aren't going to inherit anything. In fact, he's going to bequeath them all his accumulated debt. Thanks, Pop.
We've gotten away with it because (1) the US has been the fastest-growing major economy with the best investment opportunities, (2) the dollar has been the world's unrivaled reserve currency, and (3) our will and ability to repay the debt in full has been unquestioned.
We are no longer the fastest-growing major economy - that is now China with other Asian countries and India close behind - and foreign investment is increasingly flowing to those countries. The dollar is now challenged by the euro, which has done very nicely against the dollar in the past two years. As for repaying the debt, we're still committed to that, but there is increasing pressure to weaken the dollar to improve the competitiveness of our exports, and to a foreign investor a weaker dollar is the same as not being repaid
in full since the debt payments no longer buys him as much.
We will not get away with an ever-growing Federal debt forever. The longer we wait to balance the budget, the more painful it will be.