Thread: What is going to happen when the US Treasury's debt burden becomes unsustainable?

Originally Posted by Anders Hoveland

Perhaps the government cannot begin to start repaying the debt, but it needs to end its defecits now. We can talk about the government spending more money, but then the government needs to increase taxes to pay for it. Whether the taxes should be increased to pay for more government spending is a completely separate issue, of course.

The governments has already been spending more money than it collects in taxes, and just look at the result: an economy in recession, and a high debt burden. How exactly is continuing this policy going to make things different? I do not think "austerity" is the appropriate term for simply balancing the budget.

Realistically, drastic action will bring drastic results. Some 40% of government spending is deficit spending so balancing the budget is no small thing. The deficit is 10% of GDP. Balancing the budget immediately will cause the US economy to shrink by 15-20%. In 2008 the US economy shrank by 3%.

The only reasonable thing would be for the US to adopt a long term plan for deficit and debt reduction, much like it did in the 1990s. In fact, if it has stuck to that plan rather than enact the Bush tax cuts, the US would not be having these problems. It might have a little temporary budget deficit but no huge debt or deficit, even with the economy in shambles. Let the Bush tax cuts expire, adopt the spending rules from the 1990s and the budget will take care of itself while allowing the economy to grow. Within a decade the government will be running a surplus and paying down the debt.

If you want something more consider this. The only way out is for the economy to grow. Drastic budget cuts will cause the economy to decline. How will a declining economy allow the government to get out of deficit and repay its debt?

Please, please, please copy this thread so you guys can read it again in 5 years. By that time Obama will have the economy under control with 3-4% sustained growth. Budget restraints will be in place to lower the debt and inflation will take care of the rest. What an embarrassment to read this then when your doom and gloom prediction come to naught.

Originally Posted by clarkatticus

Budget restraints will be in place to lower the debt and inflation will take care of the rest.

Did you even read my explanation as to why inflation is not the easy escape it might appear to be? Inflation typically causes interest rates to rise. And the Federal Reserve is not legally allowed to just print more money without backing it with more assets, at least not technically. To cause inflation by printing more money, the Federal Reserve would have to buy many more assets (usually mortgages), and this could play havok with the economy, making it difficult for homeowners to ever pay off their mortgages, while also making homes even less affordable.

And since when has the government actually been willing to show fiscal restraint? There has not been a balanced budget for a long long time.