Vladimír Urbánek (Kurzy.cz)
Finance  |  May 30, 2011 16:15:50

Krugman: The slow death spiral of debt and inflation superjádrová


The atmosphere of urgency that surrounds the debate about reducing deficits, certainly not based on numbers. We often hear that deficits mean higher debt and then higher interest payments, which can lead to bankruptcy spiral. In principle, at this assertion is nothing wrong with that, for countries that do not face a high risk premiums, but the spiral is very slow. A simple calculation is as follows:

Last Fiscal Monitor the IMF predicts that the U.S. public deficit next year will reach 7.5% of GDP and net debt to 75% of GDP. How fast it will spin spiral mentioned? Suppose that nominal GDP growth of 4%, which is due to the relatively low historical standards. The growth in the debt ratio to get dirty 3 percentage points. For the year so the ratio of debt to GDP will increase by 4.5 percentage points.And what interest burden will increase with the associated debt? The estimate we should at least be corrected for inflation, so let's use TIPS yields. They now lie below 1%, but let's be pessimistic and use 2%. Even so, additional load is less than a tenth of a percent of GDP. If this is the death spiral of debt, is very "pooomalá".

Full article can be found on the server Patria Online , specifically HERE

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