"The deficit doesn't matter more than other obligations for future spending."
Except that the deficit is here and now and future obligations are, well, in the future. A lot can happen between now and then.
So what happens when a deficit is run? There are two choices, either the government sells bonds or it prints money. Now even politicians are aware, however dimly, that just printing money is a bad thing. So they prefer selling bonds. Now bonds are great, because buyers can assume that they will get paid, one way or other, the yields tend to be pretty low. But if there is a glut of them, or other countries for whatever reason don't want to buy them, then they have to raise rates until they sell. At some point, the bonds are more attractive that regular business bonds, and so cost of capital for improvements goes up. This, at some point, means businesses can't afford to stay competitive, so the economy starts to tank. When the economy starts to tank, then the government bonds are even less attractive. At some point, the government can't reasonably afford to sell the bonds, so they start to just print money. That, of course, triggers inflation. Which, BTW, is probably already a problem by that time. So you have a slumping economy, stagnant market, rising unemployment, rising inflation, and no way out that isn't extremely painful.
And this can go one for years. If there aren't any politicians with any guts, there is no real reason why it can't go on for decades.
This isn't just a theoretical exercise, but a model of what happened during the late '60s through the early '80s. It wasn't a patch on what happened during the '30s, but I suppose having one leg amputated isn't nearly as bad as having both... |
