Maximum irony and another level, the Fed’s role admit that Fed policy can lead to economic ruin. And it is that in an article by Scott A. Wolla and Kaitlyn Frerking for the Federal Reserve Bank of St. Louis warns that the Federal Reserve’s own policy could lead to “economic ruin”.
The aforementioned document has been entitled “Making Sense of National Debt” and explains the pros and cons of national loans in the typical Keynesian way. Simply put, a small debt is a good thing, but too much debt can become a problem. Even so, in the process of explaining the national debt, Wolla and Frerking come across a truth and that the impression of money from the Federal Reserve can destroy the economy of a country.
This is where an important question arises, when does the national debt become a problem?
Unsustainable Change
Faced with this question, Wolla and Frerking claim that debt only becomes a problem when it exceeds GDP or national income, as they call it. If the debt grows at a faster rate than income, eventually the debt could become unsustainable.
They also point out that, according to the GAO, the US national debt it is on an unsustainable path.
In this way, it is appropriate to say that the federal debt is projected to grow at a faster rate than GDP in the foreseeable future. An important part of the projected debt growth is to finance social programs such as Medicare and Social Security. Using debt held by the public (instead of total public debt), the debt-to-GDP ratio averaged 46 percent from 1946 to 2018 but reached 77 percent at the end of 2018.
In addition, as Wolla and Frerking point out, the increase in debt levels raises the risk of default. Normally, investors who hold government bonds assume this risk. While governments never have to pay the debt in full, there are levels of debt that investors might perceive as unsustainable.
One solution that some countries with high levels of unsustainable debt have tried is to print money.
Source: Michael Maharrey | SchiffGold
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