The answer to the above is subject of debate between economists. However, ask business owners, and most would probably agree that too much debt is just too much.
Nobel laureate Paul Krugman tells us ‘Debt is Good.’
Krugman says … “Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.”
People like us, who don’t have a Ph.D. in economics would say, it depends what the debt is for. Is it to invest in new ventures, to create new business growth, higher sales and higher profits, new jobs and new technologies? In that case, debt is good.
However, if the debt is used before big parties, or to compensate for the lack of earnings, a long-term trend of expenses being higher than income, then debt is bad because it just exacerbates the problems.
The fact that many Ph.D. economists do not seem to realize is that excessive debt is a depressant on the economy. When it is first created, it may provide a short-term boost, but then the debt has to be serviced. Higher entire debt is not a substitute for intelligent planning, a workable business plan, and smart management.
Dr. Larry Summers is President Emeritus at Harvard University. He served as the 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama, wrote an article in Foreign Affairs entitled, The Age of Secular Stagnation.
“The core problem of secular stagnation is that the neutral real interest rate is too low. This rate, however, cannot be increased through monetary policy. Indeed, to the extent that easy money works by accelerating investments and pulling forward demand, it will actually reduce neutral real rates later on.
That is why primary responsibility for addressing secular stagnation should rest with fiscal policy. An expansionary fiscal policy can reduce national savings, raise neutral real interest rates, and stimulate growth.”
Globally there is about $152 Trillion in debt and about two thirds of this is private debt. I remember as a university student many years ago, Paul Samuelson’s economic textbook preached that savings were bad for the economy. I had vigorous discussions with my professor about that, but I could not convince her that this was wrong. I believe in later editions, Mr. Samuelson changed that opinion.
Availability of credit from bankers, who are somewhat more likely to make prudent loans than the government, for businesses is beneficial. However, with today’s excessive banking regulations, bankers are scared to death to make a loan, even to creditworthy customers.
However, if we worry about “excessive debt” of government, we’re wasting our time. Big governments with the central bank will never go broke. The game is rigged. They can create as much credit and money out of thin air as is needed.
The US debt currently is about $20 trillion. Within 10 years, it is expected to hit $30 trillion. However, the $30 trillion may not buy you more at that time than the $20 trillion will buy you now. This is the game that is played to produce an erosion in the purchasing power of money, and the existing debt is inflated too much lower ‘real’ levels.
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