Monday, August 24, 2015
When debt boosts economy
A few days ago, the Rand Paul, who claims the Republican nomination for the presidential elections of 2016, denounced the irresponsible US fiscal policy, underlining that "the last time that the US had no debt was in 1835".
Many were quick to emphasize that the US economy has done very well over the last 180 years and pointed out that it is not so bad to owe the government money in the private sector.
Incidentally, the British government has debt for more than three centuries. The conclusion, however, is that public debt is not as bad as is said or is that a good thing? Many economists argue that it takes considerable debt to work well the economy. In short, one can argue that the reason ailing global economy, is that governments are not sufficiently indebted.
In the last five to six years we are in a financial panic, the "serious" insist that we need to cut deficits and debt now, otherwise it will become Greece! The issue of the deficit, however, is nothing but the triumph of ideology over objective facts and recognize more and more worthy people. First, because the issue of debt is a way to pay one useful things, if the price is fair. In the US there is a clear road and rail network failure, water supply systems, and many others, and the government is able to borrow at historically low interest rates. Therefore it is the right time to borrow and invest in the future and very inappropriate time to reduce public spending.
Beyond this, our historically low interest rates show what the markets want. I have already mentioned that the debt helps the functioning of the economy. As says Ricard Caballero at MIT, but other economists, the stable and reliable government debt provides "safe haven" to help investors manage risk and facilitate trade. Now theoretically the private sector can also create a safe haven such as deposits in banks, considered prudent tactic. The years before the financial crisis of 2008, Wall Street claimed to have invented entire categories of secure placements with mortgage securitizations and various other such investments. But when burst "bubble" of the housing market, all those titles with the evaluation of three A proven trash. And investors returned to shelters that offer debt of the US and a few other economies. They were led thus to falling bond yields of these countries and their interest rates.
According to the outgoing chairman of the Fed in Minneapolis, Narayanan Kocherlakota, low interest rates are a problem, because even when the economy is strong, there are large reductions in margins weakening of the economy and so it is difficult to deal with a recession. There may be, after all, impact on financial stability: very low secure placements yields may push investors to undertake excessive risk. What can be done? If we only raise rates, as requested by some types of the financial system, will undermine the fragile recovery. What we need are policies that will enable them to have higher interest rates in good times without causing slowdown. Such a policy would aim to put a higher debt level.
In other words, the panic about the debt that dominated the US political scene from 2010 to 2012, and still dominates the public debate on the economy in Britain and the eurozone, was most unfortunate and than we thought we all in against austerity camp. With their attitude governments was like hitting the economy when he was fallen down, prolonging thus the recession. Not only reduce public expenditure just when investors begged them to spend more, but perhaps sowing the seeds for future crises. And the irony of fate is that these foolish policies and all the human suffering caused presented as prudence and fiscal responsibility.
