Mass Hysteria! Recession Myths, Does Debt Cause Inflation?
For the past year and a half Americans have been postponing retirement, creating Roth accounts, getting second jobs to increase their retirement income, and taking their money out of stocks for retirement and putting them in long term treasury bonds. Americans are frightened to put money away for retirement finances because they are scared the recession is too out of control. However, according to a recent report from the Jerome Levy Forecasting Center, this panic is misguided.
Although the U.S. deficit is supposed to reach $1 trillion per year for the next decade, the reports director of research, Srinivas Thiruvadanthai, said that many people are becoming hysterical for no reason. About 50% of Americans say the deficit is “dangerously out of control”, but this report gives retirement financing some hope for the future.
The reports summary concludes the following:
Skyrocketing U.S. public debt will not lead to default, inflation, necessarily higher taxes, or necessarily slower economic growth in the future, given the unique economic environment. Public debt in the United States, the United Kingdom, and Japan can go much higher than people think–and has before–without causing the dire consequences that many fear.
Specific fears on retirement finances and retirement spending in general that have caused a financial hysteria are actually deemed as myths in this report. Retirement finances will have room to develop, and hopefully, with this report, people will spend more which in effect will help the recession lessen even faster.
Myth: America will default on their debts and become an economy like Greece.
According to Thiruvadanthai, comparing the US to Greece is like comparing apples to oranges. The US is prepared and has a history with dealing with large amounts of debt; Greece is not. The US has four major economic components in their system that Greece does not:
- The ability to manage its public debt without default
- Complete control of its currency
- Proven ability to collect taxes
- A deep liquid market for its publically traded debt
Any one of these components would allow retirement finances some breathing room. The combination of all four show little doubt that America has the historical proof that in times that the country will not fall apart and default on debts like Greece did.
It is not just Thiruvadanthai that thinks the idea of following in Greece’s footsteps is unlikely. Treasury prices have increased, which shows global bond investors are still willing to invest in the country and make those investments worth every penny.
Myth: The US debt will crush any growth.
“There is no connection between high debt and economic growth – at all,” Thiruvadanthai says in his report. In fact, what most people think is the connection, that debt causes economic standstill, is backwards if anything. In US and UK history, high public debt is usually caused by a time of war or a depression. The debt doesn’t cause the depression, the depression causes the debt. To that end, these timetables usually end in a long economic boom due to government spending in social safety nets.
Myth: All of this public debt now will raise the inflation rate late.
Once again, the belief that there is a correlation between debt and inflation is incorrect. Retirement finances can still be saved through national debt and not have to worry about a raise in inflation. In addition, it is not as easy to raise a national inflation rate as many people believe it to be; Thiruvadanthai points out that if it were, the Japanese government and Bank of Japan would have done it a long time ago. In fact, since the 1980s, inflation has gone down as the national public debt has steadily increased.
The truth will set you free, or so we’re told, and Thiruvadanthai and his team are hoping the truth about American debt will keep the panic from becoming out of control. There is no reason for families to go into debt or for retirement spending to go down. Based on these findings, the researchers stated austerity will not help bounce our economy to a period out of debt. To Thiruvadanthai, only more stimulus spending will help. “They just won’t work because the economic weakness they cause rebounds back to further weakness in [tax] revenues.”
