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Deficits Don't Matter...When Interest Rates Are Low


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    I've always been intrigued by people who express deep concern over the federal deficit. They often seem to conflate the federal debt with the federal deficit, which are two entirely different things. In short, the federal deficit is the amount the government’s expenses exceeded its tax revenues while the national debt is the total of all deficits in the past less the amount the government has already repaid.

    The government has run a deficit every year but four (1998-2001) since 1970. During those years the American economy has expanded at an exponential rate. While it's true that overall wages have stagnated for large portions of the population, that has more to do with political priorities than the deficit. Our leaders could just as easily fund a massive 21st jobs program on the deficit, but have so far chosen not to do so.

    However, the "deficits don't matter" crowd does have an Achilles heel. Interest rates have been historically low for well over a decade, which has made borrowing money incredibly cheap. But if the Federal Reserve moves to increase interest rates and the government isn't prepared then they will be forced to either increase taxes and/or slash spending.

    So, it's certainly a balancing act, but when interest rates are low, deficits just don't matter that much. Or am I missing something here?

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    I agree the deficit isn't a top priority for now, but at the same time we shouldn't just assume interest rates are going to stay absurdly low forever. My worry is that our leaders aren't thinking long-term and the party will come crashing done once again the same way it did in 1929 and 2008.

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    Normally I would be making a devil's advocate argument here, to counter. But right now and maybe for the next few years the national deficit and the national debt do not matter at all. The US dollar is still the world currency standard for all other national currencies, even after we printed trillions. And oddly it seems, that's all that really matters at the end of the day. Can the US dollar hold its value even when we massively inflate the supply? The answer so far is Yes, cause everyone is doing it too some degree to.

    It's all a balancing act and if and when the US dollar ever becomes shaky in value in the eyes of the world, that's when we should worry. But right now, deficit and debt should come a distant second in concerns over massive unemployment and depression-like economic #s overall.