Krugman: our creditworthiness is based on perceived responsibility of the political elite

[Kurt_and_Hunter]

This is a wide-ranging piece that winds up to a rather blunt assessment that a reason our national debt might become a problem is because American elected officials cannot be trusted. (What interest rates would you charge to lend to crazy people who have religious objections to raising revenue to repay the debt?)

The four paragraph rule is problematic here. I selected the four grafs that best contain the line of thought, but it's best to read the whole thing at the link.

March 5, 2010, 11:23 am
Debt Is A Political Issue



And if you do the arithmetic of debt service, that really does seem to suggest that debt isn’t a problem. To stabilize the real value of debt, all the government has to do is pay the real interest on it. So suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected; servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending. Why should that be intolerable?

And even that, you could argue, is too pessimistic. To stabilize the debt/GDP ratio, all you need is to pay r-g, where r is the real interest rate and g the economy’s real growth rate; and right now r-g looks, ahem, negative.

...

So what’s the problem? Confidence. If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral.

So what determines confidence? The actual level of debt has some influence — but it’s not as if there’s a red line, where you cross 90 or 100 percent of GDP and kablooie; see the chart above. Instead, it has a lot to do with the perceived responsibility of the political elite.

http://krugman.blogs.nytimes.com/2010/03/05/debt-is-a-political-issue/

[pokercat999]

1. This is one reply to the article that I totally agree with:

Deficits can be reduced. But, since both parties now protect the interests of the wealthy at the expense of the middle class there is no will to do it. In the past, Democrats with the majorities they have now would have reigned in the banks with regulation, made tax rates much more progressive, gotten us out of foreign military adventures so military expenditures could be reduced, and passed health care reform that reduced costs. Since they have joined the financial oligarchy, none of this is possible. Clinton and Rubin started the slide. Now Obama is following in their footsteps. Unless the Democrats get back to their roots to defend the middle class from exploitation by the wealthy, deficits will continue to grow and eventually there will be riots and turmoil such as this country has never seen.

By:

Elwood Anderson
Las Vegas NV
March 5th, 2010
4:49 pm

Edited to add authors name.

[Odin2005]

2. Holy God, the Brits were up to their armpits in debt from 1700 to 1850!

:wow:

[Kurt_and_Hunter]

3. And/or their GDP was lacking

The industrial revolution appears to have been good for their national debt.

(IIRC, the American Revolution was debt financing by George III.)

[applegrove]

4. The US could go into crisis like California if they don't start to accept some taxes to pay

for things.