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Friday, December 4, 2009

Read Jim Hamilton and you know what to think...

From the November 25 entry of www.econbrowser.com:


One of the ways I have suggested for personalizing this issue stems from the observation that $1 trillion is approximately the total personal income tax receipts collected by the U. S. federal government in 2006. So, to calculate what another trillion in deficits means for me personally, I take the amount I paid in federal income taxes that year and double it; $10 trillion in new debt will require 10 years at that higher rate to pay off. It's going to be a real problem for any politician who tries to service the growing debt burden by raising taxes. That's why I see troubles ahead for managing the federal cash flow.

But Paul feels I'm using an inappropriate metric:

Krugman says: "Jim gets scary numbers about the debt burden by assuming that we'll have to pay off the debt in 10 years. But why would we have to do that? Again, the lesson of the 1950s-- or, if you like, the lesson of Belgium and Italy, which brought their debt-GDP ratios down from early 90s levels-- is that you need to stabilize debt, not pay it off; economic growth will do the rest."

Normally, you'd think that putting off repaying a debt does not make it any smaller. The federal government can (with my wallet) pay the trillion today, or it can wait 10 years to pay one trillion plus 10 years' interest, or wait 20 years to pay one trillion plus 20 years' interest. The present value of the service cost on one trillion dollars in debt is exactly one trillion dollars today, no matter how long you put off paying (emphasis added). My comments on how much a trillion really is are perfectly appropriate for discussion of any repayment timetable.

Is it possible that some time within the next five years, the U.S. Treasury will run an auction in which there are not enough bids to roll over the debt? My answer is yes.



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2 comments:

J said...

Congrats on the victory this weekend! what a game! now it looks like you guys will be playing my alma mater in the Liberty Bowl. Hopefully it will be a high scoring enjoyable game to watch.

Randall Parker said...

Strap it on and let's play! That's the ECU motto.