Jim and His Article

When Jim was in middle school, the US debt, like Jim's grade, was relatively low. World War II debts had been largely dwarfed by growth in the 1950s and 1960s and federal spending during that time roughly matched revenue.

Deficit spending in the 80s and the 90s increased that debt so that now it nearly equals the yearly economic output of the US.

The current, more accepted argument says put the house in order, trim spending, raise taxes, but basically start working on controlling the growing debt. We'll call this Jim's mom's plan because basically we're pretty sure she wanted Jim to put his middle school house in order, study more, and goof around less.

On the other side we have Jim's plan, which when applied to our current house roughly says "deficit spending is money that is fueling growth; kill it and economies will crash". A solid rational of this, courtesy of Jim, is explained on Ezra Klein's blog. And even Kensyians believe the retraction of spending in the 1930s refueled the Depression . In Jim's world, this is akin to "Mooommmm ... if I stop hanging out with my friends, I'll never develop social skills and my big brother will beat me up."

Greece is currently heralded as an example of what happens when the house is not in order, but there seems to be general agreement that the analogy between the US and Greece doesn't work well because Greece, unlike the US, couldn't print it's own money (if you're a country and you're not in the European Union you can print your way through overspending and you're not at the complete mercy of bond markets, so goes the thinking).

So we're left with ... 1) do high debts lead to panic? 2) how high is high? and 3) did Jim really have middle school friends?

Ignoring the last one, we can look at this unbelievable dense paper first which basically says that if debt goes up then the interest rates on the treasury securities go up. Debt becomes more expensive. What we pay on interest shoots up. People flee US securities. We print money like Mary Peck Butterworth. In general, bad things happen.

But Klein/Galbraith counter that the long term US treasury rates are low, so maybe the market accepts the current situation. After all, almost all first world countries are in the same position.

Do we spend? Do we cut back? There seems to be truth to either scenario. Bond markets may not be reflecting the true risk of high debt (I mean, do you really trust Wall Street to recognize an impeding disaster?). And cutting back will definitely sting the economy. In between, the most likely scenarios are that countries with their houses in order are most likely to benefit. Not over leveraged, their abilities to invest and nimbly set fiscally policy aren't burdened by the difficulties of cutting services or raising taxes. A kind of gloom and doom but interesting analysis by Jon Markman of MarketWatch reiterates this:

While even countries that were prudent could not avoid the worldwide meltdown and recession in 2008, Drill observes, their financial systems withstood the stress. Traditional monetary and fiscal stimulus proved effective, enabling financial institutions to transmit public policies efficiently to private business and household activity.

As the result of a quick return to economic growth, Drill notes that several of these countries have already begun to withdraw their stimulus programs: Interest rates are being raised in Australia, Canada, Norway, China, and India, all of which stand out as countries that should be able to generate above-average growth and gain market share. From an investment view, companies that operate in or sell products and services to these countries should be leaders.

In addition, as the dollar declines US industries are more ripe for purchasing and our abilities to purchase cheap goods overseas diminish. Even short of world cataclysmic disaster, a house with no order invites others with better management skills to outshine. Jim may have not followed his mom's plan to the t, but he trimmed where he had to to get into UMizz and seems to be doing well. We should do the same.