Wednesday, June 30, 1999 Published at 12:05 GMT 13:05 UK
Business: The Economy
Exorcising the US national debt
It is not so long ago, that economists and politicians on both sides of the Atlantic fretted about the US government's escalating budget deficit and the ballooning size of public debt.
The days of gloom are over.
A booming economy has generated massive tax revenues, and President Bill Clinton now predicts that it would take the government just 16 years to reduce the public debt to zero.
But is exorcising the national debt a wise idea?
Debt is good
There were times when prudent governments issued debt only to finance wars. However, during the global economic depression of the 1930s, an English academic, John Maynard Keynes, came forward with a revolutionary idea.
In most capitalist countries, governments took up this idea, but conveniently ignored Mr Keynes second piece of advice: they were supposed to pay back the debt, when the economy was nicely chugging along.
Debt is bad
During the 1980s, most Western governments woke up to the nightmare of public debt. Having failed to repay their debts in good times, they found themselves caught in a vicious circle.
Every single time a debt repayment was due, governments had to "roll over" the debt and borrow even more money to cover running expenses.
When President Clinton took office in 1993, the annual budget deficit in the US stood at $255bn, and the country had accumulated a public debt of just over three trillion US dollars.
In Manhattan, a concerned businessman mounted a National Debt Clock on a wall just off 42nd Street. It showed the nation's debt piling up at a rate of nearly $9,000 per second.
It's your lucky day. You are hard pressed to pay the instalments for your car loan and your mortgage, but suddenly a letter tells you that you have earned a big fat bonus, because you have done your job well.
You pay off your car and decide not to splash out but keep up your modest lifestyle. A day later the bank tells you that interest rates have come down, reducing your mortgage payments.
That's what happened to the US Treasury.
Congress and the White House, meanwhile, agreed to cut back a bit on spending.
At the same time, the economy enjoyed little inflation and low interest rates, which helped paying the interest on the public debt.
All that created the current budget surplus, about $107bn this year, and the hope to cut down on debt.
Public finances in the US could now run in a virtuous circle. Paying back the debt reduces interest rate payments. This in turn makes it easier to pay back even more and so on - until the debt amounts to zero.
Once there is no debt anymore, taxes can be cut, and the government can spend its money on useful things like healthcare or education.
Interest rates are bound to come down too, as the government will not have to offer attractive rates anymore to compete with other people trying to raise money.
For the same reason, companies will find it easier to raise money, because investors will be looking for new places to invest.
Economists predict that the extra money will boost domestic saving and add to overall economic growth in the US.
Things that can go wrong
But let's return to the real world.
Mr Clinton's plans - and the official debt projections - work only if the economic situation does not change.
But what if ...
Investors love US debt
However, if everything goes according to plan, there will still be those who regret the disappearance of the US debt.
The US government raises most of its "loans" through US treasury bonds. Around the world, these bonds are considered to be the safest investment available.
The main advantage: Because so many people trade in US bonds, the market is always "liquid", i.e. a seller is almost guaranteed to find a buyer.
But if the government winds down its debt, the golden days of bond traders will be over. To avoid a lack of liquidity, the US Treasury has already begun to reduce the number of bond issues sold on the market.
Currently, the price of US bonds is one of the most important benchmarks in the world of global finance.
Once that is gone, the markets will have to look for alternatives, maybe a pool of blue-chip corporate bond issues.
Nonetheless, the United States may return to the mindset of Thomas Jefferson, third president of the United States and a man who knew all about debt after he inherited the burdened estate of his father-in-law in 1773.
He riled against debt issuing, as it would serve only to enrich "the tribe of bank-mongers ... seeking to filch from the public their swindling, and barren gains".
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