Many people don’t care about the country’s growing debt. Some believe that a foreseeable future low interest rate essentially means a government free lunch. Others believe that whatever the cost of this debt is, it’s all worth it, as higher profits of government spending are claimed. But there is a debate that might otherwise convince them: if inflation goes out of control, it’s easier to deal with it in a low-debt environment.
I think there is a problem with high levels of debt. First, increased debt means increased spending as the size and scope of government grows. I’m not happy with the current spending situation because I like my government being small and unobtrusive. Second, a review of the literature on the impact of government spending on growth generally reveals that such spending overwhelms the private sector. This dispels the hope that more spending will create economic wonders.
Deficit spending will ultimately bring higher taxes for future generations. It’s a very unfair burden. Interest payments on huge debts, even if interest rates are low, result in a large deficit, which in turn increases the debt itself. By 2049, according to Congressional Budget Office data, “interest payments on government bonds will be the federal government’s largest annual expenditure, consuming 42% of all projected tax revenues,” according to Brian Riedl of the Manhattan Institute. That is.
Ultimately, increased debt will also slow economic growth. Lower growth means lower innovation, lower wage growth, and higher unemployment. That’s all-out bad news. Finally, higher debt can lead to a debt crisis. These are good reasons why I want to limit the size of the government and impose financial prudence.
Interestingly, recent concerns about inflation have highlighted another reason why debt growth is a problem. When it comes to inflation, people’s expectations of price trajectories over the next few years are really important. Therefore, it is not as important as we think the current inflationary power is likely to be temporary. If people believe that inflation will continue, they will try to protect themselves from it today, and we will certainly inflate today.
In that scenario, the Federal Reserve needs to raise interest rates to curb inflation. And this is where your debt level matters. Many of our debts need to be carried forward in the short term, so higher interest rates result in a significant increase in overall interest payments fairly quickly. Soaring interest rates also slow recovery and hurt low-income Americans.
This reality may not be a problem if the Fed is unaffected by political pressure. However, the political pressure can be expected to be enormous. No government is pleased to see a significant increase in interest payments suddenly appearing on the balance sheet and then a significant increase in the size of the deficit. Especially if the administration already plans to spend a lot of money. .. This pressure grows only under control to resist rate changes that can impair growth. The Fed also makes dealing with inequality one of its priorities, which can be slow.
The good news is that some people believe, but the market doesn’t seem to believe that inflation will last much longer. If the market believes that, the indicators that measure expected inflation will reflect their concerns and interest rates will rise.
However, expected inflation indicators are changing rapidly, and historically, markets have had a terrible track record in predicting inflation. It is very unpredictable just because it is very conditional on expectations. In other words, I’m not very comfortable from the point of the story.
Do you know what expectations are and how long inflation will last? I don’t But in reality, no one actually does. That is part of the point. In that context, fiscal prudence is now the best course of action, as the political pressure in the worst-case scenario is so great that the Fed has less opportunity to actually raise interest rates.
Veronique de Rugy is a Senior Research Fellow at the Mercatus Center at George Mason University.
Why spending matters in times of inflation and high debt – Press Enterprise Source link Why spending matters in times of inflation and high debt – Press Enterprise