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Thursday 1 May 2014

Do We Really Need to Reduce US Debt?

So do we really need to reduce our debt? 
In fact, anyone who tells you otherwise has very little understanding of global finance and is operating under a delusionally gross mischaracterization of government debt. The current financial system treats it like a completely different asset class than traditional loans.

The US national debt would only foreseeably be reduced if the entire global economic paradigm underwent a tectonic shift due to new technology, and it would have to be something along the lines of universally cheap energy, energy-matter conversion, interstellar FTL travel, or teleportation.

Either that, or WWIII causes the downfall of the US government and reorganization of the global financial system around the next superpower, which would likely undergo the same cycle of debt. I am afraid we are already moving in this direction.

So any other way of looking at this issue? I guess one first needs to understand the difference between real and nominal numbers. $17 trillion sounds like a scary number, and it makes for some eye catching headlines, but in real (adjusted for inflation) terms it is not unprecedented. The better way to view our debt is not as a number in a vacuum but rather as a percentage of GDP.  If our debt is growing slower than GDP is growing then our real debt is shrinking.

The number could theoretically stay at $17 trillion forever and we would be paying the real balance down at a clip of a few percentages a year.

Read More: Need to Reduce US Debt?

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