In my previous post, the mounting federal budget deficit had me worried about the possibility of the U.S. government not being able to pay back its debt, effectively wrecking the global economy as a result. The odds of the U.S. government defaulting on its bond payments are very small but not totally negligible, according to the Greg Ip's article on the subject.
The chances of default remain pretty remote. But remote does not mean impossible. The best way to keep those chances remote is for policymakers to vow to get the deficit down once the recession is over -- and mean it.I am encouraged that the author approves of Obama's stimulus spending plan despite the country's mounting debt.
The Obama administration should not focus on debt reduction now, which could actually undermine the prospects for a recovery in the real economy. With households and businesses trying to spend less and save more, the federal government must spend more and save less -- that is, borrow more -- in order to prevent a self-feeding downward spiral in economic activity. Once the recession is over, getting our debt burdens down will hinge on Obama's and Congress's willingness to confront the looming cost of Social Security and Medicare benefits for the aging U.S. population.I wonder at what point reverses course and starts cutting spending to pay the federal debt. I guess the dollar being the choice for a reserve currency for most country's central banks gives the U.S. a special advantage. So long as the cost of borrowing remains small, the U.S. will probably have no qualm paying small interest on its treasuries.
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