Nobody Understands Debt by Paul Krugman | MY COMMENT

Nobody Understands Debt  NYT
by Paul Krugman Jan 1, 2012

MY COMMENT — What is wrong with historically low interest rates in America? If not for those low rates, twice (or, even ten) times as many American homeowners might have lost their homes due to higher payments caused by — yes, higher interest rates!

Is that any way to stimulate the economy?

Paul’s second point, — “Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing.”

Take a good look around, citizens are already impoverished on account of huge government deficits and government debt. It’s called compound interest that the government pays to foreign lenders to finance American government overspending and it goes on decade after decade.

It is money that could have been spent in America for the benefit of U.S. citizens — but instead was spent to pay astronomical interest payments to Japan, Europe, Canada and recently, China.

You err in failing to account for the difference between the situation that exists now — and the situation which would exist if there were no government debt/deficit at all.

IF all the money that has been thrown away as interest payments on federal government deficit and debt financing — had been spent wisely — just imagine all the job-creating national infrastructure projects that could be continuously running in America. We’re talking mega-billions of dollars here. You know how compound interest works.

In practice, it goes like this; supposing we are talking about the paltry sum of 100 Billion dollars:

Which is a better use of 100 Billion dollars from America’s point of view?

A) Pay it to a foreign lender to cover compound interest payments.

B) Use it to build a job-providing infrastructure project.

Results:

A) that money, once gone, will not produce anything of value for American’s.

B) that money will be paid as professional services, to engineers, draft-person’s, architects, lawyers and others — and paid to companies who hire thousands of construction labourer’s — WILL spur the economy on the macro scale and American households.  Also, a good portion of it will return to the government in the form of taxes and income-tax.

From such spending, the government could reasonably expect to recover 50% of that 100 Billion dollars in taxes, income-tax and other fees and services paid to the government by engineering and construction companies within five years!

Possibly to spend again on even more infrastructure programs — starting that process anew!

In your scenario, ever-increasing taxes to pay an ever-larger deficit/debt load eventually leads to low citizen-satisfaction levels. Don’t believe that? Wait till the income-tax rate hits 70% — there will be a revolt, or outright revolution.

Western governments have proven to be among the worst historically, to curb excessive spending. Which means eventually taxes rise to meet lender demands for payment.

We will see much higher income-tax levels in North America, just to cover existing interest payments on government debt. Of that, there is no doubt. Let’s try to keep it under 70% by not adding to the problem daily.

Finally, only an economist like yourself would have a large enough calculator to calculate the following. How many American dollars have been paid out of the country to finance government debt and to finance government deficits, since the U.S.A. began deficit financing?

Of course, that is only half the equation. The other half is this; If no deficits had been run, how much national infrastructure or education spending would that very large amount have bought?

http://brillig.com/debt_clock

For just one example of how it’s done, Saudi Arabia has paid down it’s government debt which sat at 102% of GDP 20 years ago — to 6.3% of GDP for 2011. All while maintaining balanced growth.

http://arabnews.com/economy/article554645.ece
http://arabnews.com/economy/article554176.ece

It can be done. If the Saudi’s can do it – so can America! It’s called leadership. If anyone suggests otherwise, be advised I’m not listening — because I don’t want to ‘catch’ whatever you have.

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