Borrowing more

Date posted: February 13, 2013

There’s been much attention on the national debt and ways to reduce the government borrowing fueling that debt. But some prominent economists are actually recommending the opposite – more federal borrowing. What is their reasoning? N.C. State University economist Mike Walden answers.

“Well, here’s their logic: …  Although the national debt in terms of the amount of money the federal government owns has gone up dramatically, around $16 trillion now because of the tremendous drop in interest rates, the cost of financing that debt is actually very, very low. It’s almost at a 30-year low compared to it as a percent of the overall size of the economy. And this is a sign, obviously, of cheap credit. So what these economists are recommending – and I will say that they are not a majority of economists … — and sort of saying, ‘Hey, we need economic growth, but the federal government can stimulate economic growth by spending money on things like roads, bridges, infrastructure, power grid, et cetera.’ It’s very cheap to borrow money now. There’s not a lot of demand. There’s a lot of money out there to borrow. There’s no sign interest rates are going up. So their argument is, ‘Hey, let’s have the federal government actually, rather than pulling back on borrowing, have them actually increase borrowing, spend that money on all these things that’s going to stimulate economic growth. There are things we need like roads, bridges, et cetera. And we won’t really be paying that much more because interest rates are so very, very low.’

“Clearly this is a highly debated position. But it is one that is out there.”

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1 Comment to Borrowing more

  1. by D. Stewart

    On February 13, 2013 at 1:37 pm

    Hello Dr. Walden,

    It’s a debated position indeed, but one that seem to be gaining traction in the USA and elsewhere.

    As you know, the difficulty with the ‘fill your boots with borrowed money while interest rates are low’ argument is that interest rates will go up again one day, leaving the nations that ‘filled their boots’ unable to service their debts.

    However money printing now has a new champion on my side of the Atlantic.

    Lord Adair Turner, head of the UK Financial Services Authority – note the .gov.uk internet address – is now proposing that money should be printed by the central bank and given to the government to spend as it pleases.

    The difference between his proposal and what’s currently happening is that Turner proposes that the borrowed money will not be repayable to the central bank, or to anyone else. There will be no debt. It is money printing in its purest form.

    http://www.ft.com/cms/s/0/42f943be-6fcd-11e2-956b-00144feab49a.html#axzz2K0jLq1Ph

    His (paraphrased) argument is that, provided the money printing is not taken too far, you won’t get serious inflation. My own feeling is that someone must have said something similar in Zimbabwe a few years ago.

    Lord Turner thinks pure money printing would be an ideal solution for the USA. I hope you don’t go down that path.

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