The questions of deficits and debts are not at all black and white. For example, they're gray enough to hold the $14 trillion US debt and leave many well intentioned people arguing whether this is good, bad, or indifferent. There is no formula for how much debt is too much, particularly if you're a nation state, and a nation state that prints their own currency. Now individuals, businesses, or other non-money printing entities find out when debt is too great when they can't pay off what they have and no one will lend you anymore money. However, if you can print your own money, in the end, the only real measure of too much debt is inflation and/or the destruction of the currency.
Deficits and debts are effects with underlying causes. All debt isn't bad, in fact investment debt, that is something which over the course of time will be paid off and creates more wealth is both necessary and good. However, debt created to simply continue an untenable status quo is bad debt, leading eventually to insolvency. And this is the great question of American debt, both public and private. Rob Johnson of New Deal 2.0 has an important talk looking at America's debt question. It accompanied a longer paper he co-authored with Tom Ferguson and that is well worth reading.
In the talk and paper, Johnson makes some important points in discussing the whole US debt question. First, he has asks how much debt is too much and he points to the currently popular notion put out by Rinehart and Rogoff, authors of the book, This Time's Different, that at 90% of debt to GDP, debt becomes detrimental. He's skeptical and gives his reasons. I'd have to agree. While the 90% formula comes from subsequent articles, I read the book and it gives academic writing a bad name. The historical figures beyond fifty years are at best not rigorous and many would have little value. So, if the 90% trigger is based on that, it's at best very soft. Good enough for economics I suppose. Johnson and Ferguson then put out some interesting points on how we account the debt, and these are valid.
Their second point is the more important point of what caused the debt, and here they hit the nail on the head. It is the capture of our politics and government by the moneyed interests of Wall Street and mega-corporations. Most importantly, Johnson points out the problem of the military-industrial complex and its strength due to the fact that for over a half-century now, it has become one of the greatest generators of pork in DC and has protected itself by divvying up the spoils across congressional districts to insure protection. This is an especially timely point as at comes at the fifty year anniversary of Ike's farewell address warning on the military-industrial complex. Unfortunately, the warning went unheeded, and even more unfortunately, Ike set the precedent for American politicians leaving office to lament the mess they had made and complain about an increasingly broken system as they washed their hands of it.
Johnson and Ferguson conclude by focusing on the scourge of money in politics and particularly its impact on our financial system and of course the resulting trillions of dollars the financial crisis added to the debt. Which, directly goes to the question, "Can we grow out of this debt?" To which my answer is no, not until our financial and political systems are fixed. And that "growth" is going to be different than the past century's industrial growth with which we are familiar.
With the help of money poured into the political system over the past 30 years, the financial industry exploded both public and private debt in America to the point where it is no longer simply a debt problem, it is now a money problem. Debt is in many ways money, and what the financial industry has done is created a vast pool of money at the top or tangential to the real economy, requiring ever more money from this financial pool for any given amount of economic activity. It has done this by increasing debt for every economic activity, say for example credit cards for consumption, and at a larger level with securitization releasing what should be illiquid debt, say mortgages, immediately back into the greater liquid money pool. This has tremendously distorted the real economy and made the entire system liquidity junkies, which is provided by the Fed with both cheap interest rates, and as that became insufficient, directly monetizing the debt.
Thus, we get to the point of money creation, and what we have seen first and foremost in the massive debt creation of the past 30 years is an abuse of the money creation monopoly given to the Fed and the banks a century ago. We need to look again at this monopoly and we will find not only is it not necessary, it is detrimental. It has certainly never been democratic. Many aspects of money creation need not go through the banks, the monopoly should be broken, but that would require a rethinking, reforming, and evolving of our political economy.