Why Today's Soaring Deficits donot matter in the short term but do in the long term
In the short term, a financial crisis because of national debt is more likely to happen today when there is flight of capital. That is foreign investors that own a large percentage of US Treasury bonds decide to sell them driving down the price of the dollar and causing inflation and destroying the economy by cutting our GDP by a large percentage. This can happen, one, if foreign investors see the US as an unsafe place politically and security vise in the short term or two if investors decide that the US is economically unsafe when compared to other places to invest. Now for the second thing to happen we would need to look at a foreign investor’s perspective on economically safe long term places in the world to invest. When it comes to this the two places would be the US or Europe. Europe suffers from an even greater downward economic pressure because of retiring populations and social security than the US. So the likelihood of capital flight to Europe is minimal. China is another place that one might contend as an economically good place to invest, but China is a new economy that has but a very small GDP when compared to both Europe and US. Until this changes, the likelihood that China is a better venue for foreign investments than the US can be discounted. Thus there are no other places where foreign investors can expect better, surer economic gains in the rest of the world than the US.
The second point of the US being a safe place in the short term is mainly a security problem and when compared to the rest of the world the US is probably a safer place or at least as safe as any other large industrialized economy. So we don't really need to worry about the collapse of the economy due to soaring deficits? No, not true because we have the long term to worry about.
What is a major concern, is that if the debt grows and becomes a large percentage of the GDP more than say 70% or 80% then we have a problem since financial capital needed for the growth of the economy as well as most of the taxes collected will be soaked up by the interest on these debts. This potentially could cause an economic collapse. Thus the main concern we should have is to make sure that the debt doesn't rise above 10% or 20% and never to the level as described above. We can do this by either increasing the size of our economy by increasing the GDP or by reducing the national debt by paying some of it back. Preferably both strategies should be employed so that we keep the faith in foreign investors or any investors that the US does prefer a long term strong fiscal policy. Thus we should always try to repay some of the debt come good times such as the 90's.
The second point of the US being a safe place in the short term is mainly a security problem and when compared to the rest of the world the US is probably a safer place or at least as safe as any other large industrialized economy. So we don't really need to worry about the collapse of the economy due to soaring deficits? No, not true because we have the long term to worry about.
What is a major concern, is that if the debt grows and becomes a large percentage of the GDP more than say 70% or 80% then we have a problem since financial capital needed for the growth of the economy as well as most of the taxes collected will be soaked up by the interest on these debts. This potentially could cause an economic collapse. Thus the main concern we should have is to make sure that the debt doesn't rise above 10% or 20% and never to the level as described above. We can do this by either increasing the size of our economy by increasing the GDP or by reducing the national debt by paying some of it back. Preferably both strategies should be employed so that we keep the faith in foreign investors or any investors that the US does prefer a long term strong fiscal policy. Thus we should always try to repay some of the debt come good times such as the 90's.
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