Friday, February 26, 2010

Government Debt: Adding Gasoline To The Fire...

David Oakley of the Financial Times reports the following:

"This year the Organisation for Economic Co-operation and Development forecasts $16,000bn will be raised in government bonds among its 30, mostly industrialised, member countries. This is a sharp increase of $4,000bn in the space of just two years as governments around the world have turned to the capital markets to pay for fiscal stimulus packages and bank bail-out initiatives."
There are a plethora of economists who live in la la land about the consequences of persistent deficits. Their rationale, in simple words, goes like this: deficits saved the world from economic depression, since we haven't had a problem in the recent past there is no need to worry now, but at some point maybe we will, and if this ever comes into fruition let future generations worry about it, in the meantime let's party. In economic jargon, as a Keynesian economist recently put it, this would be translated as "the benefits of the higher output today exceed the cost of debt service tomorrow."

Of course, modern economists don't speak in clear terms. The more esoteric and convoluted their speech, the more adulation they receive -- or so it seems. The same folks who never saw the current crisis coming are at the forefront of policymaking and forecasting greener pastures ahead. You would be wise avoiding their analysis.

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