Public Debt - fact that modern governments can run deficits...

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THE PUBLIC DEBT
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The Federal Debt Public debt: $12.5 trillion or 60% of GDP in 2010 If the government incurs a surplus, the federal debt decreases by the amount of the surplus. If the government incurs a deficit, the federal debt increases by the amount of the deficit.
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The Rise and Fall of Government Debt
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What Happened to the Debt from World War II? The government paid for World War II by borrowing on a huge scale. By the war’s end, the public debt was more than 100% of GDP, and many people worried about how it could ever be paid off. The truth is that it never was paid off. In 1946 public debt was $242 billion. By 1962 the public debt was back up to $248 billion. By then nobody was worried about the fiscal health of the U.S. government because the debt–GDP ratio had fallen by more than half. Vigorous economic growth, plus mild inflation, had led to a rapid rise in GDP. The experience was a clear lesson in the peculiar
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Unformatted text preview: fact that modern governments can run deficits forever, as long as they aren’t too large. 6 • Current account deficit and debt not as large when seen as % of GDP • World’s reserve currency • “Safe Haven” – stable economy • Ability of government to tax citizens • Want to import to US – keeps their currency low against the dollar Why are foreigners willing to keep lending to the US? However, experts are concerned this won’t go on forever………. • Foreigners lose confidence in the US economy and stop buying assets • If demand for US assets drops, it would force interest rates on US assets up • If interest rates go up, out debt burden rises until there is a chance of default • Can’t a government that has trouble borrowing just print money to pay its bills? • Yes, it can, but this leads to another problem: inflation....
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