Saints preserve us we're $16Trillion in debt and no end in sight!!! Oh, the humanity! Save the children, but abandon all hope!!! The Chinese are coming, the Chinese are coming! We owe them TRILLIONS and the day of reckoning will soon be upon us!!! . . . and other assorted bullshit.
PLEEEEEASE! The American economy has NEVER been seriously harmed by government deficits or the public "debt." That's not to say that the opposite does not occur, that is, the economy can certainly be injured in the absence of public sector deficits. You need only look to the goldilocks era during the late Clinton years when the government accounts went into surplus.
What, you say? The Clinton years were pure Tony the Tiger "GREAAAT." Cornflakes, I say! Follow me below and I will explain why.
The problem, of course, is that a federal government surplus will ONLY occur in the presence of either a trade surplus or a private sector deficit. The federal government surpluses from 1998 to 2001 occurred at the same time we were running huge trade deficits. Consequently, the US private sector went into massive debt. After the Bush tax cuts there were a few quarters of private sector saving, then massive debt again accumulating from 2004 to the crash. See graph.
After the crash, automatic stabilizers (decreased tax revenue, unemployment insurance, TANF, etc) and huge deficit spending in the form of bailouts and stimulus again went into private sector surpluses, but by the time of the crash private debt was 500% GDP (almost double what it was going into the great depression), so deficit spending went to reduce debt rather than into consumption, which is why the economy remains sluggish with low aggregate demand.
This is all sort of basic macroeconomics that everybody should understand. Sadly, most readers either missed basic econ or it was so poorly taught that the result was simply learned confusion. Nevertheless the mechanics of sector balances is really straight forward. Take all the activity in the (federal) government sector, cancel all the debits against all the credits, what's left is the sector balance. Do the same for the domestic private sector, and for the foreign sector. Add the three balances together. They equal ZERO. If they don't, you did something wrong because it is a mathematical identity. When one of the three is positive, at least one of the others is negative. Like a three-way teeter-totter.
I am constantly disheartened by the economic commentary in the media, mostly because progressives constantly adopt the right-wing meme about debt and it is clear they neither understand the issues, nor do they have a divergent position on the matter. The only difference is the degree of wrongness: they are rhetorically hawkishly wrong on the right, they are rhetorically dovishly wrong on the left, and in terms of actual historical outcome those positions are reversed.
If progressives would understand a few things, we could have a real debate about the economy, but the current state of affairs is pathetic. Everyone is flocking to talking points and making broad statements about debt without first trying to understand the nature the money that underlies it. It is disconcerting when everyone who's supposed to be on your side babbles incomprehensibly about such an important topic.
1) Federal Deficits drive private wealth. Unless we are net exporters, there is only one choice: either the Federal Government or the private sector must be in deficit. Take you choice.
2)The national debt consists entirely of the government's exclusive obligation to accept dollars (and only dollars) to discharge tax liabilities. Look at a dollar bill, read what it says. That is the government's sole guarantee. It also has a legal tender provision, but that pertains to private debt and is really irrelevant to this argument.
3)If you hold a US Treasury bond (like China) the government makes two guarantees. a) It will pay the promised interest in dollars (the same dollars it creates at will); and b) it will be redeemed for dollars, whereupon the government will accept those same dollars in payment of tax liabilities. So should China decide to call our debt, here's what happens. We give them dollars for the bonds and we stop paying them interest. At that point they have huge pile of paper that guarantees them the right to extinguish that specific amount of US Tax liabilities, and we have huge piles of iPads and flatscreen TV's. and a mountain of lesser stuff that they made with their labor and their materials. Ouch! So instead, say they refuse to buy any more of our bonds. But remember, we sell them bonds because they don't want non-interest bearing cash. They can't sell all their junk to us for anything but dollars. Don't want bonds? Keep the dollars. Don't want dollars? Sorry, Charlie, take your crap home. If you sell in America you sell for dollars. And course, if you don't want to sell here for dollars, we might just start making them for ourselves and for our export market. So, should we be scared of all this? Are you insane? Are they? Is suicide a viable threat from an adversary?
4)The government does not have to borrow money, it issues money, it creates it by spending it into existence, often taking a private asset in exchange. The government sells bonds to satisfy the private sector's desire to hold savings in interest bearing instruments and to support interest rates in the private market. If the bond vigilantes don't want dollars-based assets, we can stop squandering sovereign money supporting their market and let interest rates fall to nothing. That just lowers the propensity to save and stimulates consumption The government imposes taxes to insure the value of monetary instruments. Government debt is not debt in the conventional sense of the word - it is the governments IOU issued against the aggregate of the government's UOME; it is the transduction of a one-sided private sector real asset into a two-sided financial asset (debit and credit), remitting the credit back as private sector wealth. That credit and its associated debit are both extinguished when the government receives it in payment against a tax liability. That is a monetary fact.