Closing the Budget Deficit Will Wreck the Global Economy
Posted at 12:45 p.m. on Aug. 8, 2012
Karl Smith worries that closing the US budget deficit as the world enters a glut of savings could lead to major bubbles and bursts.
“Well, the US Government is on a path to borrow a lot of money. In some ways this is convenient as the World is on a path to save a lot of money. Yet, suppose the US Government reforms its ways and ends its rising deficit. The world will still wish to save, but the US Government will not be there to borrow. The result is a world with an ever increasing propensity towards bubbles. Indeed, if things simply continue along their current path and the US decides to cut the deficit then we should expect bubbles far greater than the ones we have experienced in the past.”
“Thus we should be very worried about the consequences of closing the US budget deficit, not just now, but over the long term. The US budget deficit bedevils policy wonks. But, far better is the devil you know, than the devil you don’t.”
