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InsiderOnline Blog: November 2012

Public Debt = Expectations That Cannot Be Met

In case you thought the national debt is mostly just “money we owe ourselves,” and therefore not really a problem, Arnold Kling is here to sober you up:

Another term that economists have coined in the context of government debt is “sudden stop.” What that means is that when all other sources of lending have dried up and the public's tolerance for hyperinflation has been exhausted, the government must suddenly balance its budget. That is how government debt crises typically end. At that point, the irreconcilable expectations of Lenders and Spenders are resolved, one way or another.

The political conflict created by the debt in the United States is as large as it is in Greece. I believe that Americans will not be as prone to violent demonstrations, but the underlying anger will be there nonetheless.

The burden of the debt is that we create an ever-deeper conflict of interest between Lenders and Spenders. Yes, if you think of Lenders and Spenders collectively, you can say that “we owe the debt to ourselves.” But that is a dangerously vacuous way of looking at it. Large government debt is a recipe for a bitter political stew. [The American, November 20]

Posted on 11/29/12 07:26 PM by Alex Adrianson

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