There’s a lot of talk about how the US has too much debt. But what if the problem is not too much debt, but too little?
After WWII the US had run up a mountain of debt - more, in proportion to the economy, than we have now. Economists expected the economy to shrink. After all, the country had been in a depression before the war, and now it would have to lug the weight of the debt, as well. But the economy didn’t shrink; it expanded.
In the early eighties the US went into what was then the worst recession since WWII. Ronald Reagan was president, and he pushed through a combination of tax cuts and spending increases that resulted in the largest increase in the debt since WWII. Again, the economy expanded.
We’re told deficits are bad, and that they stifle the economy. They steal capital away from the private sector and force interest rates to go up. They impoverish later generations, who will have to pay for our extravagance.
But what if that’s all nonsense? What if it’s all based on misconceptions about the nature of debt and money, and the relationship between them?
[li]The debt does not need to be paid back. [/li][li]The debt is a liability to the government, but an asset to the private sector.[/li][li]Increasing the debt increases private sector wealth.[/li][li]The US cannot default on the debt. (Putting aside Congressional theatrics, for the moment). The Fed has purchased around $2 trillion in debt in the last few years. It could purchase far more than that - in fact, it could purchase all of it, if it wanted.[/li][/ul]