Your Opinion: Fear of national debt exaggerated
Friday, February 28, 2014
A letter from a gentleman in Centertown expressed two concerns regarding the national debt: the federal government can’t go on borrowing and printing money because interest payments on the debt will become impossible to bear; and paying interest on the debt is about the same as throwing the money in the stove.
As to the first point, there are natural limits on the extent of our borrowing, limits which we have not yet reached. The most obvious limit is the marketplace.
Today the market will lend the U.S. government money at favorable rates, e.g. 2.7 percent on a 10-year bond and 0.29 percent on a two-year bond. If the market thought we might not make the payments on what we were borrowing it would charge much higher rates. For instance, the market today charges Greece 7.5 percent on a 10-year bond. We are a long way from that.
The inflation rate is another limit. If the government prints too much money that will drive up inflation, possibly to dangerous levels. Today inflation is running around 1.6 percent far from dangerous. In fact, this is a very low rate and is a sign of a sluggish economy. Inflation nearer the fed’s target rate of 2 percent would be a good sign.
Thus, neither the credit marketplace nor the inflation rate is telling us that the government is borrowing or printing to much money.
As to the second point that paying interest on the debt is like throwing money in the stove, that is not true. Interest is paid to someone and whoever receives it does something with it and this activity often helps the economy.
The single largest holder of U.S. debt and therefore the largest receiver of interest payments is the Social Security trust funds (16 percent of the debt.) Social Security payments are then paid out and these result in consumer spending, a large component of our economy.
China holds 8 percent of our debt, but even that is not dead money. Interest paid to China puts dollars in their banking system, which in turn helps finance Chinese imports. In 2013 China bought $122 billion of goods and services from the U.S. This activity too helps our economy.
So paying interest on our debt is not like burning the money in a stove. Most of the money recycles and helps our economy. Fear of the national debt tends to be overblown.