When And At What Level Is It Important To Stabilize The Public Debt?

by Wadsam | March 28, 2013 11:41 am

IOU[1]The US has run a current account deficit since 1982. The issue of public debt is being increasingly debated in the country as people want to know more about the economic future of the country. However, the government is not too keen to give out an informative or even rational account on it. The fact is that the choices are hard and the sacrifices are colossal, and these are but the standard repercussions of an economy facing deficit reduction.

Firstly, a lot of people are contextualizing debt stabilization which morphs its meaning altogether. In fact, debt stabilization prefers to impede the debt ratio from increasing. In this context, the term debt indicates the amount of debt held by the public, which is what matters the most for what comes later. It is really important that people understand that if we want our debt to increase at a slower pace compared to the GDP, the deficits do not need to be brought to zero level. Instead, the level of deficits would be ideal at 3 percent below GDP.

Considering the aforementioned facts, one could question if they are reliable and for the betterment of the economy. The answer to this question is that resorting to this idea might not always be an economically feasible option. In times of economic downturn, war, depression, and recession, there is an upward trend in the debt ratio for understandable reasons. The amount of borrowings typically outpaces growth temporarily to prevent almost certain economic disaster.

On the other hand, if we consider this issue on a broader scale, there are certain benefits associated with lowering the debt ratio. This is applicable during times of economic improvement, i.e. when the economy starts getting back onto the track. Firstly, the interest rates usually decrease in weaker economies, whereas working towards the settlement of the accumulated public debt is widely ignored which is, in fact, a huge blunder.  Not adhering to implementation of laws or acts to improve debt ratio, in turn, guides the economy back into a phase of recession which shrinks the economy as a whole and has a negative effect on the global economic scenario as well.

However, when the economy starts improving and interest rates start improving as well, it becomes even more costly to retain a huge amount of debt. Therefore, if we want to avoid devoting resources to debt services which could instead be used for improved infrastructure, education and health services etc., it is a better option to try and reduce the debts. The projected public debt of the US by the end of 2013 is $10.6 trillion.

Furthermore, a reduced debt ratio leaves the economy in a better position for the next time a country’s public debt has to rise. Debt ratios that keep on increasing during better and worse economic times indicate a constant discrepancy in the willingness to increase revenues required so the government can avoid borrowing. In fact, it seems that government borrowing will eventually surpass everything else. On the other hand, spooked investors are more attracted towards increased interest rate premiums that actually pressure the debt cycle.

Furthermore, if we look around at some of the most successful economies, Japan is a shining example. The Japanese economy has been experiencing steady growth since the 1990s and it has maintained its incredible course for more than a decade. It is very rare and difficult for an economy to follow in Japan’s footsteps and to keep itself stable for consecutive decades. Even more surprising is the fact that the interest rates in Japan still remain low and the investors consider debt ratio to be on a safer side, which is rarely found in even the most developed economies of the world.

Conclusion

Public debt is largely affected by the government’s borrowings. However, it cannot just be said that the government must stop borrowing at all costs, since there also is the need to stabilize interest rates. Although the United States has a growing economy, the issue of public debt is definitely a matter of concern for the public and the government.

By Angelina Jennifer

Author Bio

Angelina is an economist by profession and writes for different publications as well as for many debt consolidation programs out there. She is currently associated with Consolidated Credit[2] as their community manager, one of the leading debt consolidation companies across the globe.

Endnotes:
  1. [Image]: http://dev.wadsam.com/wp-content/uploads/2013/03/IOU.jpg
  2. Consolidated Credit: http://www.consolidatedcredit.org/debt-management/debt-consolidation/loans/

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