MYTH NO. 1: Debt is harmless if it’s issued in a nation’s own currency.
In 2015, Nobel laureate Paul Krugman wrote that “because [public] debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer).” Stephanie Kelton, a prominent advocate of modern monetary theory, says that “we should think of the government’s spending as self-financing since it pays its bills by sending new money into the economy.” In 2011, Warren Buffett said, “The United States is not going to have a debt crisis as long as we keep issuing our debts in our own currency.”
Yet in a recent University of Chicago survey of prominent economists, not one agreed that a country that issues debt in its own currency does not have to worry about deficits. Future debt will stem largely from anemic revenue growth and increased expenditures on an aging population. The result will reduce future national saving — the sum of saving by the private and public sectors — and drag down future national income. This could happen through higher interest rates, which choke off investment and reduce production and income.
Or it could happen through greater borrowing from abroad, which would allow us to maintain production but siphon off increasing resources to debt payments. Estimates by the Congressional Budget Office and others indicate that these effects could be substantial. Politically, sustained deficits and rising long-term debt make it harder to garner support for new policies or to address the next recession, war or emergency.
MYTH NO. 2: Low interest rates mean debt doesn’t matter.
In a recent address to the American Economic Association, Olivier Blanchard, a former chief economist at the International Monetary Fund, said, “The signal sent by low [interest] rates is that not only debt may not have a substantial fiscal cost, but also that it may have limited welfare costs.” In Foreign Affairs, Jason Furman and Lawrence H. Summers wrote that low rates mean “policymakers should reconsider the traditional fiscal approach that has often wrong-headedly limited worthwhile investments.” Although these preeminent economists have been careful to qualify their statements, the popular discussion has sometimes jumped to the conclusion that low interest rates mean that deficits don’t matter.
Low interest rates certainly make debt more palatable and make the crisis scenarios look silly, but they are not a panacea. Under current law, the Congressional Budget Office projects that federal debt will rise from about 78 percent of gross domestic product (GDP) now to more than 150 percent by 2048 and will continue to increase afterward. Net interest payments are projected to rise from about 1.8 percent of GDP to more than 6 percent, which would be larger than the entire Social Security program.
Financial markets imply that low rates will persist, but have been wrong at times in the past. We can borrow and consume more if interest rates stay low forever, but if we accumulate a lot of debt and then rates rise, we will face major problems.
“Debt is money we owe ourselves”. I think this is a reckless perspective. It inherently means that we can take on debt infinitely. So, think of all the US T-notes floating around the world. What if foreign countries cashed them in (hypothetically). The US would have trouble paying it back. It wouldn’t be as simple as “Well, let’s just print some more bills.”
