This is obviously not a political blog but I just couldn’t resist commenting on the recent USA Today story about the US government’s outstanding debt. My economics professor in college always said not to worry about the government deficit as long as it was less than 5% of GDP. I guess it always depends on who is doing the measuring.
While corporate accounting standards are rigorously enforced, when it comes to figuring out Uncle Sam’s balance sheet the rules are a bit different. Here is a quote from the USA Today article:
The federal government recorded a $1.3 trillion loss last year — far more than the official $248 billion deficit — when corporate-style accounting standards are used, a USA TODAY analysis shows.
My professor also would remind us that the US debt was always held in dollars. Since the government prints money, in a worst case scenario they could just print a whole lot of money and get rid of the debt. I always thought this was a very simplistic solution. I don’t think this will work since no one will want dollars when there is an oversupply and no backing. After all, with no gold standard everyone is relying on the full credit and faith of the US government.
Finally, my very enlightened professor would remind us that the US owned a whole bunch of nukes. I mean how could Japan, China and other countries demand repayment with a fully armed cowboy?
My professor’s points were funny and we all laughed. For some reason I never thought any were really good answers to the problem. These days I’m a bit concerned since excessive government borrowing can pose a huge problem for the national investment climate as well as interest rates.