Why Economists Don't Care About the Debt
Summary
TLDRThe U.S. holds the world's largest national debt, yet economists like Larry Summers and Olivier Blanchard argue it may not be as detrimental as traditionally thought. With historically low interest rates, the cost of servicing the debt remains manageable. Modern Monetary Theory and insights from the Great Recession suggest that countries with low rates can afford to spend more without severe repercussions. The Biden administration's economic recovery strategy reflects this thinking, embracing a calculated risk with trillions at stake.
Takeaways
- πΌ The U.S. has the highest national debt in the world, which has reached an all-time high even when compared to the size of its economy.
- π Despite concerns, the U.S. did not experience a spike in interest rates or inflation after significant borrowing and spending post-Great Recession.
- π Interest rates have remained low, suggesting that the cost of servicing the national debt has not increased significantly.
- π‘ Larry Summers and Olivier Blanchard proposed that if economic growth exceeds the interest paid on debt, more borrowing could be beneficial.
- π The idea that federal debt isn't always detrimental is gaining traction, influenced by Modern Monetary Theory.
- π The focus should be on the interest paid on debt as a percentage of GDP, which has remained low despite increasing debt.
- π΅ Countries with low interest rates, like the U.S., can afford to spend more and run larger deficits without severe negative consequences.
- π U.S. Treasury Secretary Janet Yellen has testified that the relative interest payments on debt have not increased, suggesting it's a more meaningful metric.
- π The Biden administration is taking a calculated risk in economic recovery, betting on large-scale spending to stimulate growth.
- π The global financial system is built around borrowed money, and the current low-interest environment seems to be supporting this approach.
Q & A
What is the national debt?
-The national debt is the total amount that a country owes to its creditors, which is the combined sum of all annual federal budget deficits.
Why is the U.S. national debt considered so significant?
-The U.S. national debt is considered significant because it is the highest in the world and even when compared to the size of the U.S. economy, the debt to GDP ratio is close to record highs.
What was the concern after the Great Recession regarding the national debt?
-After the Great Recession, there was concern that the rapid borrowing and spending by the U.S. government to revive the economy would lead to high interest rates, inflation, and potentially an economic collapse.
Why did interest rates and inflation not spike as feared after the government's spending?
-Interest rates did not spike because they actually fell and continued to fall, remaining low. Inflation also did not take off, contrary to initial fears.
What was the criticism after the financial crisis regarding the government's response?
-The criticism was that the government had not done enough and should have borrowed and spent more to speed up the economic recovery.
What question did Larry Summers and Olivier Blanchard ask at the 2017 conference?
-They asked why not spend more money if the growth generated from borrowing is higher than the interest paid on that debt.
What is the core belief of Modern Monetary Theory regarding federal debt?
-The core belief of Modern Monetary Theory is that federal debt isn't always bad and can be managed effectively, especially when interest rates are low.
Why has the cost of paying U.S. debt remained low despite the debt increasing?
-The cost of paying U.S. debt has remained low because interest rates have stayed very low, making the debt more manageable.
How does the Biden administration view the national debt in terms of economic recovery?
-The Biden administration views the national debt as a calculated risk, betting on large-scale spending to aid economic recovery, based on the premise that low interest rates make it affordable.
What metric does U.S. Treasury Secretary Janet Yellen consider more meaningful for assessing the burden of debt?
-Janet Yellen considers the interest payments on the debt relative to GDP as a more meaningful metric for assessing the burden of the debt on society.
How does the current low-interest-rate environment affect the strategy for government borrowing?
-The current low-interest-rate environment allows for more government borrowing and larger deficits without severe negative consequences, as the cost of servicing the debt remains manageable.
Outlines
π National Debt and Economic Recovery
The paragraph discusses the national debt of the United States, which is at an all-time high and the largest in the world. It mentions the concern over the deficits and how they will be paid. The script then challenges the conventional wisdom about the national debt by suggesting that the traditional charts showing the debt-to-GDP ratio might not be as alarming as they seem. The speaker proposes that the focus should be on the interest paid on the debt relative to GDP, which has remained low due to historically low interest rates. The idea is supported by economists Larry Summers and Olivier Blanchard, who argue that if the growth from borrowing exceeds the interest paid, then it makes sense to borrow more. This perspective is in line with Modern Monetary Theory and has influenced recent economic policies, including those of the Biden administration, which is taking a calculated risk to stimulate economic recovery.
Mindmap
Keywords
π‘National Debt
π‘Deficits
π‘Debt to GDP Ratio
π‘Interest Rates
π‘Inflation
π‘Modern Monetary Theory (MMT)
π‘Larry Summers
π‘Olivier Blanchard
π‘Interest Payments
π‘Economic Recovery
π‘Janet Yellen
Highlights
The national debt is the total amount owed by the country to its creditors, which includes all annual federal budget deficits.
The U.S. has the highest national debt in the world.
The national debt is at an all-time high, even when compared to the size of the U.S. economy.
The debt-to-GDP ratio is close to record highs.
Interest rates and inflation did not spike as feared after the Obama administration's spending to revive the economy.
Interest rates fell and remained low, suggesting that low rates could persist for a long time.
Critics argue the government did not do enough to stimulate the economy after the financial crisis.
Economists Larry Summers and Olivier Blanchard proposed that if growth exceeds interest paid on debt, more money should be spent.
Modern Monetary Theory suggests that federal debt isn't always detrimental.
Blanchard and Summers suggested focusing on the interest paid on debt as a percent of GDP.
The cost of paying U.S. debt has remained low due to low interest rates.
Economists and investors are rethinking government borrowing with low interest rates.
U.S. Treasury Secretary Janet Yellen testified that interest payments relative to GDP have not increased, suggesting the debt is manageable.
The Biden administration is taking a calculated risk with economic recovery, betting on continued low interest rates.
The global financial system is built around borrowed money, and the current low-interest environment seems to be working in favor of this system.
Transcripts
this is the national debt the total
amount that we as a country owe to our
creditors the combined sum of all our
annual federal budget deficits lumped
together you might have heard about it
our main story tonight concerns the
national debt the deficits and how we're
going to pay for that the national debt
has hit an all-time high here in the u.s
we have by far the biggest national debt
in the world and right now it's the
highest it's ever been even when you
compare it to the massive size of the
u.s economy the debt to gdp ratio we're
still pretty close to record highs
you've probably seen these charts before
their favorites on cable shows and in
newspaper columns they even make the
occasional appearance on the house floor
but what if i told you
maybe they don't matter
let's back up
[Music]
tonight i want to talk about the debate
we've been having in washington over the
national debt after the great recession
the obama administration spent hundreds
of billions of dollars to revive the us
economy which sent the national debt
soaring economists and politicians were
worried about what would happen with the
u.s borrowing and spending so much so
fast would interest rates spike would
inflation take off would the economy
come crumbling down crushed by the
weight of an unprecedented fiscal burden
it did not and inflation didn't take off
and interest rates on the government's
debt did not spike in fact and this is
key interest rates fell and then just
kept falling low rates are going to be
with us for a lot longer low rates near
zero rates forever and a day very low
interest rates for a very long time when
the dust settled from the financial
crisis the biggest criticism was that
the government hadn't done enough and
should have borrowed and spent even more
to speed the recovery along now enter
two famous economists larry summers the
former u.s treasury secretary and
olivier blanchard the former chief
economist at the imf at a 2017
conference about lessons learned from
the great recession these two asked a
big question if you're borrowing money
to help your economy grow and the growth
you're getting is higher than the
interest you pay why not just spend more
money here's how blanchard put it you
can still issue that and in effect not
repay it if you never repaid the debt to
gdp ratio will still eventually converge
it will never explode it's very clever
it can be done the idea that federal
debt isn't always so bad is not a new
one it's a core belief of modern
monetary theory a school of economic
thinking that's been gaining traction
over the last few years as the debt has
gotten larger but what blanchard and
summers said was rather than focusing so
much on this chart we should be thinking
about this one the interest that the
government pays on all that debt as a
percent of gdp because interest rates
have stayed so low the cost of paying
for the us debt has also stayed low even
as the debt itself has taken off so if
we look at this chart you would find the
trends
much less alarming politically i
realized how much of a bond
this is but
this is what comes out the big
implication is this that countries with
super low interest rates like the us can
afford to spend a lot more and run up
much bigger deficits without facing such
negative consequences
that idea has caught on among economists
and investors who have started coming
around to a whole new way of thinking
about government borrowing and top
economic policy makers haven't been far
behind u.s treasury secretary janet
yellen gave testimony in march and she
was asked specifically if the growing
debt was cause for concern her response
might sound familiar interest payments
on that debt
relative to gdp have not gone up at all
and
so i think that's a more meaningful
metric of
the burden of the debt on society this
change helps explain the biden
administration's approach to the
economic recovery they're taking what
economists see as a calculated risk a
bet made in trillions of dollars whose
stakes are no less than the future of a
nation and of a global financial system
built around borrowed money and for the
moment with interest rates still so low
the bet appears to be paying off
Browse More Related Video
Public Debt: how much is too much?
"My Biggest Fear Is A Reverse Market Crash" - Prepare For This Now Before 2025 | Patrick Bet David
The Surprising Benefits of Corruption in the Economy
Mutuo Consolidamento Debiti
The Surprising Link Between GDP Growth and Long-Term Rates | Top of Mind Series
Why The U.S. Wonβt Pay Down Its Debt
5.0 / 5 (0 votes)