1945

Dr. Krugman, The question of sustainability of the US sovereign debt will be considered by the People’s Bank of China as well. Since the PBoC is the biggest official creditor to the US sovereign, their perceptions on this issue are critical.

But back then we had the only viable industrial economy in the world. Today our economy is just a Wall Street Ponzi scheme supported by Washington and our tax dollars. Where is the engine to pull us out of debt?

And, of course, the other lesson of WWII is that it is perfectly reasonable to run up the national debt in response to a national emergency, in the expectation that the debt will be controlled after the emergency is over. “Emergency” doesn’t have to mean war — staving off the return of 1929 easily qualifies.

The war was followed by decades of real economic growth, fuelled by rapid growth in fossil fuels. Now the situation is completely different. The debt will have to be paid back from stagnant or even shrinking real resources.

Isn’t it true that Americans’ personal balance sheets were in much better shape in 1945? I’m just guessing, but it seem to me that all of those years of conservation, war-bond-buying and high wages during the war left Americans pretty flush.

So while the govt. had a huge debt – Americans had real wealth. Today, the government’s balance sheet looks awful AND Americans themselves are no better off.

Basically, the government’s debt was the people’s wealth. Today, the government’s debt is China’s wealth. That’s a big difference.

to be censored – not politically correct ;)

it never ceases to amaze me how some people choose to eliminate other people’s views, they won’t even consider alternative theories, they will accept only what falls in their frame of reference.
It’ll like saying : “I have a monopoly on economic ideas, I don’t care about anything else.”
…
it happens mostly when you’re torn from reality and refuse to see what is obvious to many; then you take refuge in a world of statistics, percentages, curves, green shoots, recoveries, while the rest of the world watches in disbelief.

…that’s not the point. The only source of re-construction after the war was the United States. In other words, any demand, no matter what the source (Cold War, Marshall Plan, stuff needed here in the U.S.) was served from the United States. We were the only large source of manufacturing and other technical/financial services. That scenario no longer exists. Servicing demand (i.e. building stuff and providing services) will come from many other places other than the U.S. as the economy recovers; this will dilute the net gain to the United States as growth takes place on a distributed bases throughout the global market place. Therefore, our ability to grow and make it easier to service debt will not be as easy as it was after the war.

I thought the lesson was the opposite — that the military industrial complex took on a life of its own and has grown to have a disproportionate share of influence and funding . . .

Dr. Krugman: I think you are making the argument that we will be able to pay down the debt we have currently accumulated because we have done so in the past. But in the current situation we aren’t even going to try.

OMB estimate of the President’s budget shows debt even net of financial assets growing each year until it hits 70 percent of GDP. We are planning to build in structural yearly deficits of 4 percent of GDP. These are not the signs of a nation serious about paying down or even controlling its debt.

In 2003 when CBO projected national debt would reach a maximum of 37 percent of GDP, you wrote, “With war looming, it’s time to be prepared. So last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.” (//www.pkarchive.org/column/031103.html)

What has changed since then? A convincing answer is not the zero lower bound because we will presumably not be at the zero lower bound or experiencing years of deflation at that point.

Speaking of wars, deficits, and debts – Paul, I’d like to see you tackle the issue of the military-industrial complex and its effect on our economy.

We dealt with it. Perhaps we dealt with it since the manufacturing bases of Europe, Russia and Japan were destroyed and we were the only game in town. We were in a much better position demographically as well. The large deficits that you advocate (although not nearly as large as you would like) are nothing more than mal-investment. Most of the infrastructure work is going to re-pave roads- what kind of multiplier effect do you suppose that will generate? We are giving away a lot of fish through a huge expansion of food stamps, but not teaching anyone how to fish. Borrowing money to finance mal-investment (unoccupied and over-valued housing/commercial real estate) got us into this mess and governement sponsored borrowing to finance mal-investment is not going to get us out of this mess. If you are going to use your formidible IQ to advocate vast expansions of governement spending, at least have the decency to demand that government perform their tasks in an efficient and productive manner. Our governement, at every level, is a failure factory that fails in most of its tasks. Most tragically, their failure in education has a very real multiplier effect that is destroying the competitiveness of our country. The government is also responsible for the largest Ponze Scheme in the history of the world, which is destined to leave retirees with broken promises and a brutal combination of old age and poverty.

We dealt with it because we had a high-yield energy surplus to utilize for economic growth: fossil fuels. Please tell us how the economy can growth that fast on the EROEI of (currently uninstalled) wind and solar.