Why Economists Don't Care About the Debt

Bloomberg Quicktake

3 Sept 202104:22

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

💼 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.
📉 Despite concerns, the U.S. did not experience a spike in interest rates or inflation after significant borrowing and spending post-Great Recession.
📉 Interest rates have remained low, suggesting that the cost of servicing the national debt has not increased significantly.
💡 Larry Summers and Olivier Blanchard proposed that if economic growth exceeds the interest paid on debt, more borrowing could be beneficial.
🌐 The idea that federal debt isn't always detrimental is gaining traction, influenced by Modern Monetary Theory.
📊 The focus should be on the interest paid on debt as a percentage of GDP, which has remained low despite increasing debt.
💵 Countries with low interest rates, like the U.S., can afford to spend more and run larger deficits without severe negative consequences.
🌟 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.
🚀 The Biden administration is taking a calculated risk in economic recovery, betting on large-scale spending to stimulate growth.
🌐 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

00:00

📈 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

💡National Debt

National Debt refers to the total amount of money that a country owes to its creditors. It is the cumulative sum of all annual federal budget deficits. In the video, the national debt of the U.S. is highlighted as being at an all-time high, even when compared to the size of the U.S. economy. The script discusses concerns about how the national debt might affect the economy, such as causing interest rates to spike or inflation to take off.

💡Deficits

Deficits occur when a government's expenditures exceed its revenues, leading to a shortfall that needs to be financed by borrowing. The script mentions annual federal budget deficits as contributors to the national debt. It discusses the aftermath of the Great Recession, where the Obama administration spent heavily to revive the economy, leading to a significant increase in the national debt.

💡Debt to GDP Ratio

The Debt to GDP Ratio is a metric that compares a country's national debt to its Gross Domestic Product (GDP). It is used to assess a country's ability to repay its debt. The video script notes that despite the high national debt, the U.S. debt to GDP ratio is still close to record highs, indicating a level of concern among economists and politicians.

💡Interest Rates

Interest Rates are the cost that a borrower pays to a lender for the use of money. The script points out that contrary to expectations, interest rates did not spike after the U.S. government borrowed and spent heavily. Instead, they fell and remained low, which is a key factor in the ability to sustain high levels of debt without severe economic repercussions.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses fears that the U.S.'s heavy borrowing and spending would lead to inflation, but this did not occur, as inflation did not take off post the Great Recession.

💡Modern Monetary Theory (MMT)

Modern Monetary Theory is an economic theory that advocates for increased government spending, financed by the issuance of currency, to stimulate economic growth. The script mentions MMT as a school of thought that has been gaining traction, especially as national debt has increased. It suggests that if the growth from borrowing exceeds the interest paid, then more borrowing could be beneficial.

💡Larry Summers

Larry Summers is a former U.S. Treasury Secretary and economist who, along with Olivier Blanchard, questioned the traditional concerns about national debt. In the video, Summers is part of a discussion about the potential benefits of borrowing to stimulate economic growth, especially when interest rates are low.

💡Olivier Blanchard

Olivier Blanchard is a former Chief Economist at the International Monetary Fund (IMF). The script highlights Blanchard's argument that if a country can borrow at a rate lower than its growth rate, it can indefinitely roll over its debt without the debt to GDP ratio exploding.

💡Interest Payments

Interest Payments refer to the amount of money paid by the government to its creditors for the debt it has accumulated. The video script emphasizes that the cost of U.S. debt, as measured by interest payments relative to GDP, has remained low despite the increase in debt. This is due to the persistently low interest rates.

💡Economic Recovery

Economic Recovery refers to the period during which an economy returns to a state of health after a downturn. The script discusses the Biden administration's approach to economic recovery, which includes taking on more debt as a calculated risk, based on the belief that low interest rates make it affordable to do so.

💡Janet Yellen

Janet Yellen is the U.S. Treasury Secretary who, in the video, is quoted as saying that the interest payments on the national debt relative to GDP have not increased, suggesting that this is a more meaningful metric for assessing the burden of debt. Her statement reflects a shift in thinking about the implications of national debt.

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.