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What problems can an increasing federal debt create for the country? Can deficits be good for an economy?

What problems can an increasing federal debt create for the country? Can deficits be good for an economy?

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  • 1 decade ago
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    Of course deficits can be good for the economy, if the spending is put to productive use. That's utterly common sense. That applies to government just as it applies to businesses and individuals. Businesses run cash flow deficits all the time -- they borrow money from banks or sell bonds. This is the "capital" in capitalism. They borrow money in order to build plants, buy equipment, etc, and they pay off the loans with the cash flow those assets generate. That's fundamental finance.

    Nearly all individuals run deficits when they buy their houses. Few people would actually buy a house if they had to save up money to buy the whole thing with cash. Yet mortgages are considered to be good, prudent debt, because houses are a major instrument for wealth creation for families.

    So it is with government. Of course government is notorious for wasting money. Nevertheless if they run a deficit and sell bonds to do something productive (build roads, maintain a national defense, support education), those things can well contribute to economic growth to a degree that there is more benefit than cost.

    Moreover you need to keep in mind that when the government runs a deficit, that means they left money in the pockets of individuals that would otherwise have been taxed away. And it is individuals spending or investing their money freely, according to their own preferences, that maximizes economic productivity. (Sadly, a fact that's not well known.)

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