In 2011, the developed world will be facing larger deficits and mounting concerns over national stability; the year will usher in loud demands for public sector deleveraging, even though deleveraging in the private sector has yet to be completed. The mistake in demanding governmental deleveraging programs is that the fears underlying the costs and risks of public debt are exaggerated. While households are cutting back and the private sector is functioning below potential, it is the job of the government to focus on stabilizing programs and not focus attention on austerity programs.
Many individuals in Congress and media are focusing the American citizen’s concern on the unstable environment created by public sector debt on the long-term, yet most statements cannot be proven since long-term dynamics are rarely accurate. Even in analyzing contemporary fiscal concerns through the lens of basic economics, it illustrates that the current government debts are the symptom and not the source of economic distress in the Western world. Moving burden (debt) from the private and public sector would have hampered the private sector’s ability to save money and depress spending, which would have further hurt the economy. This would, in turn would have caused household incomes to collapse, hindering their ability to save finances or pay off debt.
A new study from the IMF entitled Is There an Optimal Debt-to-GDP Ratio? suggests that most developed countries are no where near their borrowers limit. This report states that the U.S. may reach 100% debt to GDP by 2015, which is more pessimistic than the CBO projections of 90% by 2020, as stated in the Washington Post report entitled Debt will rise to 90% of GDP. Moreover, Carmen Reinhart and Ken Rogoff – Banking Crises: An Equal Opportunity Menace – have examined the affects of a couple of centuries of sovereign debt, and their findings suggest that public debt does little discernable harm until it reaches 90% of GDP.
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