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Where’s the Austerity?


Global debt now exceeds $100 trillion, according to the Bank of International Settlements. Over the past five years, debt has increased by about $30 trillion. What’s more, governments have been the largest issuers.

Low interest rates have attracted governments to the appeal of using debt to fund public projects today. As the saying goes, there’s no such thing as a free lunch. At some point this debt is going to become due. At best all these governments have done is shifted expenditure forward by taking from future generations and giving to the present ones.

The magnitude of the indebtedness is what is striking. The $30 trillion of new debt issued over the past five years represents the full output of the American economy for two years. Even ignoring interest payments (which even at low interest rates are fairly hefty on $30 trillion of principal), this is a phenomenal obligation to have to pay back.

At least the IMF is not worried. After all, adjusting government budgets so as to ignore interest payments on these debts yields a positive analysis. By looking at just the primary deficit, the Group of Seven countries are actually running government budget surpluses!

Measures like the primary deficit are like playing golf and not counting the strokes until you’re on the green. Back in the real world, the total amount of expenditure a government makes matters – not just that portion not spent on debt repayment.

Over the last five years the press has been full of discussions of austerity. Allegedly, governments have scrimped and saved to get by. Now we find out that we are collectively $30 trillion more in the hole compared to where we were when the recession began? If this is austerity, I’d hate to see the alternative.

(Originally posted at Mises Canada.)


Contact David Howden

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, and Academic Vice President of the Ludwig von Mises Institute of Canada.

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