Growing National Debt Should we be worried?. Federal Deficit Federal Debt Leads to a larger $16.7...
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Transcript of Growing National Debt Should we be worried?. Federal Deficit Federal Debt Leads to a larger $16.7...
Deficit & Debt relative to GDP
• Current Deficit = 1.3 Trillion (2012 numbers)
• Current Debt = 16.7 Trillion• Current GDP = 15.8 Trillion
• Deficit as % of GDP = 8.0% of GDP– Highest since World War II– Recent high (1983) 6% of GDP
• Debt as % of GDP =105.0% of GDP– Highest ever (1946) was 120% of GDP
Interest Rates
• Interest rates are the price of borrowing money– There are short term & long term interest rates– The Federal Reserve only controls short term interest rates
• Government Bonds represent long term interest rates– the interest rate Government borrows money at!
• Low interest rates are critical for a healthy economy – As interest rates ↑ => cost of borrowing money ↑ => GDP falls
Crowding Out Handout
Gov’t Deficit Spending
Leads to Rising Federal DebtLeads to Rising Federal Debt
Gov’t must sell more bondsGov’t must sell more bonds
Forces long term Interest Rates Higher
(crowds out private investor—they borrow less money for investments because interestrates are higher)
Forces long term Interest Rates Higher
(crowds out private investor—they borrow less money for investments because interestrates are higher)
Economic Theory of: “Crowding Out”
More Gov’t Deficit Spending
Leads to Rising Federal Debt
Gov’t must sell more bonds (borrow more $)
Forces long term Interest Rates Higher
(crowds out private investor—they borrow less money for investments because interest rates are higher)
GDP falls => could lead to recession
Has the Rising Debt hurt the U.S. ?
Has Crowding Out Occurred?
10-Year Gov’t Bond Interest Rate
No! U.S. interest ratesare historically low!
Short Run analysis:
Structural deficit: occurs with the economy at full potential output (peak of business cycle, high GDP)
Cyclical deficit: Portion of deficit attributable to a slowdown in the business cycle (during recession)
2-Types of Deficits
Structural Deficits are significantly more problematic than
Cyclical DeficitsThey do not go away when the economy improves
Analyzing Deficits Summary
• Debt & Deficit should be viewed as % GDP
– This allows you to compare past deficits
• Deficits can place upward pressure on long term interest rates
– This is known as crowding out
• Today’s Deficit is primarily a structural deficit
– Entitlement spending must be addressed to correct it
Balancing the Budget?“The only real question” is whether adjustments to taxes and spending will come from a “careful and deliberative process” or from a “rapid and painful response to a looming or actual fiscal crisis,” Ben Bernanke Chairmen of Federal Reserve
2010
U.S. Debt in Comparison
• Greece 125% of GDP
• Italy 115% of GDP
• European Union (EU) debt limit of 60%
• Japan 180% of GDP– Japanese citizens save money => so they buy Japanese Gov’t Bonds– No crowding out!