things seem to keep chugging along whether we're running deficits or a surplus
I didn't develop cancer either in the times I was smoking or those when I wasn't, so why should I have quit?
Short answer: At some point, left unchecked, it will begin undermining the dollar, foreign investors will stop propping up our currency, and the economy will implode.
Also, I believe the interest on the national debt costs real money, though I am also somewhat fogged (geddit?) here.
Largest single line-item in the federal budget is interest on the debt.
Think about it this way: Suppose you are a working married man with a wife who likes to go shopping a lot. Let's say that in a particular month, the amount she charges to the credit card is more than the $$ you have left over after bills (rent, electric, food, etc) are paid. What happens? This deficit accumulates over time due to interest costs until you are able to pay it off. Assuming your wife's spending is habitutal, the interest costs become increasingly burdensome as you are less able to pay off the debt that's been accumulating, thanks to your wife's regular charging. It also means that whatever saving was occurring before the credit card problem has diminished and has likely ceased, and so spending on/saving for say, your child's education or a new refridgerator has been "crowded out" by your interest payments. Additionally, your credit rating declines and you face higher interest costs for things like loans.
As you might imagine, you are the U.S. and your wife is the government in this example. Essentially the same thing happens when the government runs deficits: it drives up interest rates and crowds out investment.
Granted, some deficits are cyclical: in a recession, the tax base shrinks and payouts such as unemployment benefits increase. If your wife previously had a job and found herself laid off, all other things being equal, you will find yourself in debt. Hopefully short-lived.
The doller is something of an international standard currency, and has been since WWII. That is, on the international market, the dollar is, or was, the solid currency, and treated that way, solid. Therefore, it has been to our advantage to run something of a debt for the simple reason that it gets more dollars out there, so people can use those dollars. Their reliance on our dollars makes us stronger. One of the big things the dollar has been used for is for buying oil. Oil transations only take took place in dollars.
Now we're competing with the Euro, and our debt seems to be too high. I can't give any exact answer for what happens there, but the short, as I understand it, is that the dollar becomes more risky, less solid, and therefore, less desirable. As the dollar loses its prominence, we lose economic power.
That's international. On the domestic front, foreign investment is necessary to keep the US economy going. High debt makes investment more uncertain, and foreign investment will therefore lessen. If investment lessens too much, it could lead to a recession, or worse, a vicious down circle - depression.
Sorry the mechanics are so skimpy...I've got some good books that explain some of these mechanisms, but, alas, I've already got plenty of reading for today.
My understanding is roughly the same as Missy's, I think. But the underlying concern, as I understand it, is (a) interest rates, (b) inflation, (c) economic distortions, and (d) default.
Deficit spending means that the govt. is competing with private borrowers for funding. More demand means higher interest rates. Higher interest rates mean less capital available for entrepeneurship, etc. GDP growth falls. (Often you hear the phrase "crowding out" here). You could further argue that as interest rates grow, ROI on US investments decrease, so dollar based investments are less attractive.
Inflation (IIRC) occurs both because (i) we've raised the cost of capital, and that gets passed on to consumers, and (ii) we're pissing away money inefficiently (b/c it's govt.) and paying more for services than we should. (I'm super not sure on this).
Govt. spending distorts the way the economy should look because we're spending cash inefficiently and govt. programs never die or reduce benefits. Because the govt. reacts so slowly to the market, the market overproduces certain things.
Default is nightmare that will never ever happen.
Looking at it, you could probably list (b) and (c) together.
I've asked the same question, and here is the answer I've been getting.
Yes, increased debt should devalue our currency over the long run, but what has been happening is that China has been keeping their own currency low, and has been loaning us the money to keep our currency high.
Why would they do such a thing? So they can continue to sell us stuff, lots of stuff. I think that means Chinese peasants are currently getting screwed so we can live the good life.
But, if China decides enough is enough, what will happen? The value of the dollar will fall, and US interest rates will rise. If this happens gradually then that is probably okay. Our exports will cost less, we should sell more of them, people will probably buy less imported Chinese stuff, and our trade should come more into balance. Gradually, we can adjust, exporting the things that make sense and producing locally the things that make sense.
If it happens fast? Ugh. What if the price of everything imported doubled? What if home mortgages jumped to 18%? Everyone with an ARM is screwed. Housing prices crash, affecting even the people without an ARM. Real estate tax revenues plummet. Schools will be faced with lower tax revenue and increased bills.
Max has a nice piece on the BBC site today; not entirely on-topic, but these points link with each other anyway..
http://news.bbc.co.uk/1/hi/business/4244925.stm
There is nothing wrong with going into debt if it is for something you need like a house, winning WWII or getting out of a recession; but Bush is using the debt to constrain our future. Tax cuts today, social security cuts tommorow.
776233: Hey, does anyone know where I can find a list of gas stations with low prices in my area?
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