1) The national debt is not literally a generational transfer. This is easy to see because everyone
who holds the debt (government bonds) today will eventually be dead, leaving the possession of the
bonds to their children and grandchildren. In other words, the interest on the debt will be paid from
some members of future generations to other members of future generations. (We will deal with issues
created by foreign ownership below.) The debt can involve a generational transfer only insofar as it
slows the economy’s growth, so that it produces less in the future.
2) The high dollar (not the budget deficit) is what causes the trade deficit and therefore leads
the United States to borrow from foreigners. No one buys foreign made goods at Wal-Mart
because the government is running a budget deficit. They buy foreign made goods because a high
dollar has made foreign goods cheaper than comparable U.S.-made goods. The high dollar also makes
U.S. exports more expensive for people living in other countries.
3) A large trade deficit requires that we either have a very large budget deficit or extremely low
private savings or some combination. This is an accounting identity. If we are borrowers
internationally then we must have very low domestic savings. And we are borrowers internationally
because we have an over-valued dollar. In other words, the high dollar requires us to either have large
budget deficits or to have low private savings.
4) The stock and housing bubbles led to an enormous reduction in private saving through the
wealth effect. Research shows that $100 in additional stock wealth will lead to $3 to $4 of additional
consumption, meaning that saving drops by this amount. The housing wealth effect is estimated to be
$5 to $7 of additional consumption for every $100 of housing wealth.
This means that a $10 trillion stock bubble would be expected to reduce annual saving by $300 billion
to $400 billion. An $8 trillion housing bubble would be expected to reduce annual saving by between
$400 billion and $560 billion. These bubbles have been the main cause of the low savings rate in the
United States over the last 15 years.
See link for rest of summary found on pg. 3 and a broader and more detailed discussion of all 7 points
http://www.cepr.net/documents/publications/debt-2011-06.pdf