The National Debt Is About to Soar. Without a Rescue, It Would Probably Soar Even More.... - 0 views
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The case is strong for spending a large amount of money in the short term to fend off worse economic woes down the road.
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The United States government is poised to take on a huge amount of debt to contain the effects of the coronavirus pandemic, with budget deficits on a scale not seen since World War II looking likely.But the only thing worse for the public debt outlook would be if it didn’t. That’s why a broad range of economic analysts — including even many fiscal conservatives who generally view high public debt as a long-term threat — support aggressive action.
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The very large deficits on the way in 2020 are more likely to leave the United States in a better fiscal situation for the years ahead than an alternative in which the government is more tightfisted but fails to prevent the widespread collapse of American businesses or help workers in desperate financial straits.
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Economists focus not on the absolute level of the debt, but on the interest costs to service it relative to the size of the economy. So a prolonged recession tends to be worse for the debt picture than some extra spending. Moreover, signals from financial markets suggest that the government should have little trouble borrowing vast sums of money on favorable terms
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The exact numbers are still unknowable. The $2 trillion stimulus package has come together so quickly that the budget office has not had time to do its customary modeling of its fiscal impact. (Parts of the legislation are designed as loans, so the hit to the Treasury will be less than the headline number.) G.D.P. is a guessing game at this point.
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As the economic outlook dimmed over the last month, interest rates plunged to unprecedented lows. The United States government can issue 30-year bonds at only a 1.44 percent interest rate at Thursday’s close — and in inflation-adjusted terms, borrowing costs are negative.
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Simple math shows why. If the national debt were to rise by $2 trillion compared with what had been forecast, and the government paid for it by issuing 30-year bonds at current rates, the debt service cost would be about $29 billion a year, a trivial amount in a $20 trillion economy. And unlike a private borrower, the government never need pay down its debt; theoretically the debt can remain on the books indefinitely so long as the cost of interest payments is manageable, which in turn depends on economic growth.
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The Fed may one day need to raise interest rates and sell off its holdings of Treasury bonds to prevent inflation. But that would most likely occur at a time when the economy had returned to its pre-coronavirus trajectory and was seeing higher inflation levels than have been evident over the last decade.All evidence now suggests that day is far away. Currently deflation, or falling prices, is more likely to be a problem. The price of oil, at around $23 a barrel, is roughly one-third the level at which it started the year, and bond prices imply that inflation will average only about 1.07 percent annually over the coming decade.