My Debt, your Debt and Future Poverty.

I told you in previous installments of this series of essays that we, in the USA, are not facing one economic crisis but two.

The fist crisis is a recession. It’s a common event in the long run of market economies. Recessions are defined by serious people (according to me) as two consecutive quarters or more of economic shrinkage. Recessions go away whether any government does anything about them or not. One school of thought (Keynesian), to which the Obama administration belongs, maintains that large government spending – stimulation- can lessen or shorten a recession. I argued that the Obama stimulus package of several months ago cannot possibly stimulate, even if you believe in the stimulation scenario.

The second crisis, by far the most serious, is the abnormally high debt the federal government has incurred since President Obama came to office. It disturbs me because the people, you and I, will have to pay interest on the debt for a long time, and eventually re-pay the principal. Else, the government will have to repay its debt in bad currency, in devalued or in eroded currency. If this happens, we will simply all be poorer, in real terms, If your dollar is worth half in ten years of what it is worth now, you will simply have to pay two dollars for what you buy today for one dollar. There is no reason to assume your income will automatically follow. This is a common fallacy (perhaps the topic for another essay): It takes about forty Indian rupees to buy a US dollar today and the same mountain bike that costs 400 US dollars in this country costs 600 US dollars in India. A good income in India would be 12,000 dollars per year. (That’s about twelve times the national average.)  Continue reading →