Tuesday, 20 October 2015

High government debt does not stop government borrowing more.

The Hutchins Center (which seems to be part of the Brookings Institution) has a series of articles which purport to explain some basic economic problems. In one article entitled “The Hutchins Center Explains: Debt and Deficits” and under the sub-heading “Is debt at 74% of GDP a problem?” they claim that when the debt is at about that level it may be difficult for government to borrow more. As they put it:

“However, no one really knows at what level a government’s debt begins to hurt an economy; there’s a heated debate among economists on that question. Many economists think that more private borrowing will be crowded out if the government’s debt remains this large as the economy strengthens. Debt at this level, though, does limit the amount of flexibility the U.S. government has if it confronts another financial crisis or a deep recession and wants to borrow heavily, as it did during the Great Recession. It probably would be hard to add another 35 percentage points of GDP (or $5.7 trillion) to the national debt.”

Well excuse me, but if a lot more stimulus is needed and government wants to borrow a lot more, then clearly if it simply borrowed a lot more and left it at that, then interest rates might rise, and private investment could be crowded out.

But assuming the central bank AGREES that more stimulus is needed, it’s not going to let interest rates rise, is it? That is, it will simply print money and buy back some of those government bonds with a view to making sure interest rates DON’T RISE. In fact the central bank may even CUT RATES.

So what’s all this about “crowding out”? It’s all nonsense.

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