I’d like to start with a fairly basic concept, because if we can’t agree on this there’s no point going further. Debt isn’t always bad. Financial analysts will talk about good and bad debt. A mortgage is good debt, a high credit card balance is bad debt. This isn’t to say the national debt is good debt, but before any reasonable analysis can be made we have to accept that there can be good borrowing.
So, how do we know if debt is bad? And how bad is it? What problems do we create by having too high a debt? As I understand it, a high national debt has three main consequences. The first, and most obvious, is interest. The more debt you have, the more it costs. It is generally unwise to pay interest with more borrowing, but it is possible as long as more credit is readily available. Which leads us to the second consequence, higher interest. This manifests as a group generally referred to as bond vigilantes. These are investors who object to the way the US government handles money by selling bonds, thereby increasing the cost of government borrowing. The final, and most popular point in economics, is increased inflation. This connection is kind of indirect, but it is still very strong, as the methods for dealing with debt and the failure to do so both generally cause inflation. While national debt is an incredibly complicated issue, most of the nuance comes back to one of these three issues.
So, how bad are these things? Conservative economists have been claiming since 2009 that bond vigilantes are returning and inflation will shoot up any day. And for good reason, this is what their economic models tell them should happen. But it hasn’t. In fact, we’ve seen nearly the opposite, interest floating below the average for the last decade, and the bond markets have dropped steadily over the course of the economic crisis.
What this should be telling us is that, at least temporarily, the immediate negative effects of borrowing money are being overshadowed by the economic crisis. Which is what liberal economists have been saying since the crisis began. But what about the long term effects? Well, that’s another subject.