Chart from big picture. John Mauldin writes:
Deficits are not necessarily a bad thing if kept in check and restraint is shown. But everyone cannot run deficits at the same time. If we don't buy $700 billion in goods, then that money cannot be recycled back to our debt. It is that simple.
The issue is that the US is not buying all the cheap manufactured crap from China, Japan and the other countries that fed their deficits back into the US Treasury bonds. Which raises the issue, all the money that is being borrowed to put all these countries in deficit; where is it coming from? From my simple understanding of economics, it only leaves domestic savings, increased taxation and inflation as the mechanism to pay for all the borrowing. Mauldin believes that all the borrowing in the US and Europe will leave the bond market 'seriously distorted'. It seems inflation is the inevitable outcome in such a case.
- All the usual suspects are still buying US treasuries. See, for example, this article in today's FT.
- Private sector savings have soared. That's both an increase in household saving and a decrease in company borrowing
- When the world starts going pear-shaped, anybody with money invested in the developing world gets nervous and starts shifting it to the industrialised nations.
On the second question, there is another three-part answer:If your total debt is, say, 80% of your GDP, then a return to fiscal balance, 2% real GDP growth and 2% inflation will reduce it to 60% of GDP in seven years and 50% of GDP in 12 years. Sure, getting to fiscal balance will be difficult, but even that's not really all that important. So long as your annual fiscal deficit as a fraction of real GDP is less than real GDP growth + inflation, debt as a share of GDP will decline over time. So in the above example, an ongoing fiscal deficit of 3% of GDP will still see debt-to-GDP falling.