I Wear Pants;1298547 wrote:
On the Chicago School of thought side you have people who say austerity is necessary because deficits are unsustainable in the long run.
Well, you have the widely accepted classical theory that says deficit spending is offset as people anticipate higher future taxes. Then along comes Reagan to validate Keynes, and no one can say for sure why but the empirical evidence is contradicting theory. It's an anomaly, but then for some 20 years or more - in the US and globally - the anomaly continues to be repeated.
But Keynes never said that was sustainable. However, no one is practicing the surplus side of the theory. So Keynes is not correct, he just not nearly as wrong as the classical proponents.
Then, sometime in the 2000's, arguably even Bush's first term, the effect dissipates dramatically. Is it just masked by a dominant global deflationary force? I don't know. But in the past 4 years, stimulus/deficit spending, globally, virtually a nil impact. So classical theory is again winning.
No, you cannot sustain growing deficits. You can shrink them with inflation or organic growth, so I don't think you need to make a massive push to pay it down.
Now, my own theory is that goverments are taking advantage of global deflationary forces to collect an invisible tax. The US, at least, prints money and writes ITSELF an IOU. Historically that's inflationary and unsustainable. But I can't see where inflation is ever going to take off (because of global deflation) such that the money supply needs to be shrunk and, therefore, the debt repaid. So approx. half the debt the US govt owes itself will eventually be canceled, written-down, or most likely "restructured" via some sort of accounting gimmickry.
If we assume the real interest rate (deflation) is -2%, then 2% of GDP is something like $300-$400B. That's the free money or govt windfall and is theoretically sustainable until the dynamic changes. But $1T+ deficits are still a problem. If and when the dynamic changes it's a real problem.
Officially I think the fed targets 2-3%. Unofficially I think they'd prefer 4-6% for a lot of reasons. No matter how hard they try, they just can't get it to budge. And when you print that kind of money, it has to go somewhere.