Friday, November 07, 2008

Should we worry about the deficit?

I was listening last night to a radio program on which Robert Kuttner said that the deficit was nothing to worry about, because the ratio of national debt to GDP is around 1/3 of its level at the end of World War II.

What he failed to note is that during WWII, households saved like crazy, in part because materiel was needed for the fight against fascism. Because there was plenty of personal savings with which people could buy bonds, the run-up in the debt was quite manageable. The US doesn't have such savings right now. It is fortunate for us (but perhaps dangerous from a political point of view) that the rest of the world has done a better job savings.


View from Above said...


I agree that the America and other nations should worry about deficits. The reason is that has been a huge transfer and creation of wealth to Asia and resource-producing countries with SWFs which then invest globally. So the current account deficit and the excessive consumption do matter to some extent for the well-being of the U.S.

Also after the Asian financial crisis, it took only 4 to 5 years for the region’s economies to recover because its residents have a high savings rate to total GDP. In the West because the savings rate is lower to GDP this recession will not be an easy one to get out of. The downdraft in equity markets has shaved an estimated hundreds of billions from personal retirement accounts.

People are going to be forced to save more out of current income to fund retirement needs. I believe the first of the boomers are going to be turning 63 next year adds urgency to this savings theme.

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