Green Room

The National Debt matters, even at low interest rates

posted at 2:25 pm on June 3, 2012 by

Jazz Shaw interviewed Joe Weisenthal about his recent piece at Business Insider suggesting the low interest rate on a ten year US treasury bond proves “the fact of the matter is that the size of the U.S. debt or deficit just doesn’t matter that much. Actually, it’s never mattered at all.” This didn’t add up for Jazz and the interview does not seem to have clarified much. I have a few observations.

Weisenthal tells Jazz: “The US is not going to ‘run out’ of money, because the US prints its own currency. The real issue is: If the economy gets cranking again, and the government doesn’t slow its spending, inflation would be a problem.” And Weisenthal acknowledges in his BI piece that inflation (and I would add expectations thereof) would drive the interest-rate spiral many fear will eventually occur.

Weisenthal also notes the correlation of interest rates with economic growth. He further notes: “The path of U.S. interest rates is following the same path as Japan, which is in one of the most famous/longest slumps of all time.”

What he does not elaborate upon is Japan’s general situation. Japan risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, according the Organization for Economic Cooperation and Development. Moreover:

Japan’s economy is almost the same size as it was in 1992—one of the most stunning economic statistics of the past generation. It is also a glaring warning to the U.S. and other countries entering the fifth year, or more, of stagnation in real growth.

This failure has multiple causes—crucial among them, a naïve faith in Keynesianism. Japanese policymakers, and some foreign observers hold a faith in Keynesian stimulus bordering on theological. A narrow form of Keynesianism argues for government action at or near the time of crisis, because the private sector may be paralyzed by uncertainty. Japan’s crisis is 20 years in the past, yet Keynesian stimulus has been continuously applied since then.

The results are plain. Despite racking up the largest peacetime debt in modern economic history, while entirely failing to grow, the government continues to respond to every downturn with more stimulus. This has accomplished nothing.

Contra the Krugman-esque fantasy that public debt held by fellow citizens is largely costless for the economy as a whole because it’s “money we owe to ourselves,” Prof. Donald J. Boudreaux neatly sums up the work of Nobel laureate economist James Buchanan:

When government spends money, resources that would otherwise have been used to produce valuable private-sector outputs are instead used to produce public-sector outputs. The values of these foregone private-sector outputs are a genuine cost of government projects regardless of government’s funding method, regardless of the merits of the government projects, and regardless of the nationalities of government’s creditors. And the private-sector outputs that are never produced because resources are instead used to produce public-sector outputs do not miraculously appear – they are not miraculously ‘unforegone’ – simply because the obligation to pay for public-sector outputs is deferred to the future or because the holders of the debt instruments are citizens of the same country as the taxpayers.

Prof. Kenneth Rogoff has been doing recent work in this area:

In a series of academic papers with Carmen Reinhart – including, most recently, joint work with Vincent Reinhart (“Debt Overhangs: Past and Present”) – we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more. The cumulative costs can be stunning. The average high-debt episodes since 1800 last 23 years and are associated with a growth rate more than one percentage point below the rate typical for periods of lower debt levels. That is, after a quarter-century of high debt, income can be 25% lower than it would have been at normal growth rates.


It is sobering to note that almost half of high-debt episodes since 1800 are associated with low or normal real (inflation-adjusted) interest rates. Japan’s slow growth and low interest rates over the past two decades are emblematic. Moreover, carrying a huge debt burden runs the risk that global interest rates will rise in the future, even absent a Greek-style meltdown. This is particularly the case today, when, after sustained massive “quantitative easing” by major central banks, many governments have exceptionally short maturity structures for their debt. Thus, they run the risk that a spike in interest rates would feed back relatively quickly into higher borrowing costs.

Veronique de Rugy, elaborating on Rogoff, notes:

[T]he fact that bond markets in countries perceived as safe, such as the U.S., are blasé about the debt load tells you very little about how well they are doing. For all we know, these countries’ economy could even be shrinking: “Those waiting for financial markets to send the warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time,” the authors wrote in their paper. That’s what happened to eleven out of the 26 cases in their samples.

This paper turns on its face the theory that, as long as investors are willing to put their money in the U.S. and keep rates low, we have nothing to worry about. No, actually, we should worry because low interest rates in a high-debt environment could just mean that we aren’t the ugliest in the Investors’ Beauty Pageant. Oh and by the way, the U.S. is close to entering the Debt Overhang Gang.

In short, the exploding public debt not only risks the interest-rate spiral, but also consigns Americans and their children to a lower standard of living for decades to come. Other than that, the size of the debt just doesn’t matter much, not at all.

Recently in the Green Room:



Trackback URL


Thanks for the article Karl. The one by Jazz was a bit thick and then was shat on by several trolls. Please keep writing and keeping things simple.

bigmike on June 3, 2012 at 3:45 PM

Thanks for the article Karl. The one by Jazz was a bit thick and then was shat on by several trolls. Please keep writing and keeping things simple.

bigmike on June 3, 2012 at 3:45 PM


PolAgnostic on June 3, 2012 at 8:35 PM

Hey PolAgnostic, I read that thread fight that you and a couple of others had with that troll. Please”endeavor to persevere”, in the words of Lone Watey. Thanks for your efforts. BM.

bigmike on June 4, 2012 at 1:15 AM

Low interest rates, especially compared to inflation, is a detriment to saving, as the money is worth more today and can buy more today than it can in the future, even with the interest rate. Anyone who beleives that interest rates today are higher than the inflation of items most people buy on a weekly or monthly basis just are not looking at their reciepts.

Low interest rates reduce the incentive to take risks with potentially large rewards. Investing is a matter of investment times reward opportunity / risk potential. When interest rates are lower, it lowers all calculations for risk/reward and investors are less willing to take on higher risk endeavors and stick with low risk ones with little upward wealth creation.

So, add those to the end of your list.

astonerii on June 4, 2012 at 9:14 AM

Here is what Nancy Pelosi and the rest of the Democrats promised in 2006 in order to win the 2006 elections and control of Congress:

Over the past decade, the Republican controlled Congress took our nation in the wrong direction. Too many Americans are paying a heavy price for those wrong choices: record costs for energy, health care and education; jobs shipped overseas; and budgets that heap record debt on our children. For millions, the middle-class dream has been replaced by a middle-class squeeze…

Democrats are proposing a New Direction for America…

With integrity, civility and fiscal discipline, our New Direction for America will use commonsense principles to address the aspirations and fulfill the hopes and dreams of all Americans. That is our promise to the American people….

Our federal budget should be a statement of our national values. One of those values is responsibility. Democrats are committed to ending years of irresponsible budget policies that have produced historic deficits. Instead of piling trillions of dollars of debt onto our children and grandchildren, we will restore “Pay As You Go” budget discipline.

Budget discipline has been abandoned by the Bush Administration and its Republican congressional majorities. Congress under Republican control has turned a projected $5.6 trillion 10-year surplus at the end of the Clinton years into a nearly $3 trillion deficit– including the four worst deficits in the history of America. The nation’s debt ceiling has been raised four times in just five years to more than $8.9 trillion. Nearly half of our nation’s record debt is owned by foreign countries including China and Japan. Without a return to fiscal discipline, the foreign countries that make our computers, our clothing and our toys will soon be making our foreign policy. Deficit spending is not just a fiscal problem – it’s a national security issue as well.

Our New Direction is committed to “Pay As You Go” budgeting – no more deficit spending.

And here is what Nancy Pelosi promised on January 4, 2007 when she became Speaker of the House:

After years of historic deficits, this 110th Congress will commit itself to a higher standard: pay-as-you-go, no new deficit spending. Our new America will provide unlimited opportunity for future generations, not burden them with mountains of debt.

– New Speaker Nancy Pelosi, 01/04/2007

Nancy Pelosi was Speaker of the House from January 4, 2007 to January 3, 2011. How much new debt was created during her 4 years as speaker?

Go to Debt to the Penny, and search on the period 1/4/2007 – 1/3/2011.
01/03/2011 $13,997,932,781,828.89
– 01/04/2007 $8,670,596,242,973.04

That is over $5.3 TRILLION.

Again, Pelosi and the Democrats promised:

Instead of piling trillions of dollars of debt onto our children and grandchildren, we will restore “Pay As You Go” budget discipline… no more deficit spending.

And what did they deliver?

In just 4 short years as Speaker, Pelosi added over $5.3 TRILLION in new debt, increasing the total national debt by over 60% in just 4 short years!!!.


And it didn’t end there. Democrats still control the Senate and the Presidency. And therefore, Democrats still have majority control over the budgeting and spending process.

The most recent debt numbers are:
05/31/2012 $15,770,685,085,364.14
– 01/04/2007 $8,670,596,242,973.04

The 5 worst fiscal year deficits in the history of this country have ALL come at the hands of a Democratic majority in Washington, D.C. after they promised “no more deficit spending”!

Democrats have increased the total national debt by over $7.1 TRILLION after they promised “no more deficit spending”!

They are LIARS and cannot be trusted.

They promised fiscal discipline and “no more deficit spending”, but have increased the total national debt from $8.67 Trillion to over $15.77 Trillion (an increase of over 81%) in less than 5 and a half years. And they haven’t passed a budget in over 3 years.

Any voter who wants fiscal sanity MUST vote Republican in November.

To vote for a Democrat and expect fiscal discipline is INSANE (doing the same thing over and over, expecting a different result).

ITguy on June 4, 2012 at 11:26 AM

Any voter who wants fiscal sanity MUST vote Republican in November.

To vote for a Democrat and expect fiscal discipline is INSANE (doing the same thing over and over, expecting a different result).

ITguy on June 4, 2012 at 11:26 AM

Nah, the R’s are just as bad as the Democrats. Who do you think set up the just shy of a trillion dollar precedent for bills? It was not the Democrats. It was Bush and John McCain with his gang.

astonerii on June 4, 2012 at 11:59 AM

An addendum:

An important lesson that the U.S. should be drawing from the Greek experience is how mistaken it is to be guided by low market interest rates. Since it might be recalled that as late as 2009, when it should have been obvious to all that Greece’s public finances were on an unsustainable path, the Greek government was able to raise as much long-term money as it liked at a mere 0.2 percentage points above the rate at which Germany could borrow such money. It might also be recalled how quickly markets turned on Greece and how soon a country that had no difficulty in borrowing from the international capital market at unusually favorable terms found itself totally shut out from that very same market.

This is not to say that the U.S. risks exactly the same disastrous fate as that which Greece is now experiencing if it fails to start mending its underlying public finance imbalances quickly. After all, the U.S. government has borrowed in its own currency, which the Federal Reserve can always print more of to pay off U.S. government debt. Rather, it is to say that the U.S. risks a real dollar crisis and a burst of inflation if its foreign creditors perceive that it is not serious about restoring order to its public finances and that it will resort to the printing press to payback its debts.

Karl on June 4, 2012 at 1:03 PM