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Fiscal Insight

Jun 16, 2010 • 196 Views

Picture this political cartoon: In some unknown ocean, a Chinese submarine confronts a U.S. navy vessel with the Chinese submarine captain saying, “Turn around or we sell all your T-bills.” The caption says, “Chinese sub threatens U.S. Navy.”

As expressed by Harvard Professor Niall Ferguson in a recent talk, the People’s Republic of China holds “a substantial chunk” of the U.S. federal debt. Professor Ferguson referred to China because he was discussing the connection between massive debt and global power. First though, through three questions, he presented a primer on debt:

1. How can we identify a debt crisis? We can look at the ratio between the GDP and the debt; we can compare interest payments to tax revenue; we can look at dependency on foreign funding.

2. Why have debt crises been tough to eliminate? They are difficult problems because they are political phenomena, cutting spending and raising taxes are unpopular, and irrational exuberance can be uncontrollable.

3. How can countries exit a debt crisis? They can grow their economy, lower interest rates, get a bailout, create fiscal pain, print money, or default.

Because the world’s advanced economies share a debt crisis (except for Norway and Canada), Professor Ferguson concluded his talk with, “It’s not a thousand years that separates imperial zenith from imperial oblivion. It’s really a very, very short ride from the top to the bottom.”

And that returns us to U.S. global power, the U.S. debt, and to our political cartoon (which you can see in Dr. Ferguson’s slide show, slide #32.)

The Economic Lesson

Perhaps our fiscal challenges remind us that there is no free lunch. Beyond the money that was spent, the stimulus program can be very costly.

 

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