Tuesday, December 28, 2010

Use debt responsibly

What do Venice in 1490, Genoa in 1555, Spain in 1650, and Amsterdam in 1770 have in common? All are governments that collapsed under sovereign debt. France in 1787 didn't do so well either. Jacques Attali in Newsweek discusses the history of government debt and what we might do to get out of our current mess.

Government debt draws on the resources of others -- in this case our children -- to finance something today. But debt should only be taken on under particular circumstances. First, will the people paying it back likely be rich enough to do so? Second, is the debt to be used to encourage growth, to help those people to become richer? This includes such things as infrastructure (energy, transport), health care, and education. Debt should not be used to finance ongoing government operations.

Even when used for growth, debt can get too high. Accumulating government debt is far too easy. Investors suddenly get nervous and the whole thing collapses. To avoid that there are only 8 ways out. (1) higher taxes; (2) less spending; (3) more growth; (4) more lenient interest rates; (5) worse inflation; (6) war; (7) external aid; or (8) default. The only one that is currently politically palatable is growth (and yet the GOP seems determined to make that not happen). Alas, the same hubris or blindness that allows governments to accumulate too much debt tends toward impunity when getting out of it, such as driving away creditors (as Europe routinely did with Jews) or simply refusing to pay.

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