Monday, November 21, 2011

The U.S. is in a debt and deficit crisis

The U.S. is in a debt and deficit crisis, but the crisis is that the deficit is too little and that households (not the government!) hold too much debt.

We must absolutely spend our government money wisely; toward productive things like infrastructure and employing people. There are plenty of things to spend the money on that won't compete with the private sector, will actually help the private sector, and are way more efficient then letting so many resources sit and do nothing. The government is not facing a debt default of any kind and we are no where near inflation let alone hyperinflation. We are trying to stave off deflation of the variety experienced by Japan for over a decade which earned it the title of 'the lost decade'. The government doesn't need to borrow (or tax) to spend, but it can do so if it wants to at historically low rates.

We must have a deficit to stimulate aggregate demand because consumers are under way too much debt to do it themselves. Business can't thrive without spending and consumers can't spend with so much debt to pay off and no jobs to earn an income. A debt write-down is absolutely needed. The banks received a bailout for making bad loans and, even worse, for betting multiple times on those bad loans. Debtors should receive a bailout too in the form of a write-down.

Debt and the deficit do matter.

We must write down debt and reform the financial sector (here are some good ideas). And we must increase the deficit to stimulate aggregate demand (see here).

We won't and can't recover as long as we hold so much debt and as long as the government deficit remains so small.

So, sorry Satyajit Das, you are very wrong when you say the U.S. government is in a financial crisis because it cannot sustain its debts. Note well that total U.S. debt equals total U.S. Dollar savings.

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