Ed, yes your figure 2 is a flow to flow comparison but I think it compares the wrong things, the debt should be compared to Federal Revenues not to GDP. The interest on the debt is not paid by GDP it is paid tax revenues. Also this flow-to-flow comparison only looks so good because interest rates are so low. If rates start to rise this good-looking comparison will turn bad fast as the Federal Government continues to increase its borrowing, it is not paying down any principal.

Regarding “Wall Street is behaving as if 1980s-style interest rates are about as big a worry as an asteroid strike.” This is rightly so. Interest rates are very unlikely to rise that high but interest rate on Federal Government debt does not rise very much to double the governments borrowing costs. You mentioned a time frame of 10 years. 10 years will come and go quite quickly and with no change in borrowing the Federal Government will have more debt in 10 years than it does now, and interest rates could easily double by say 2040 and they would still be historically low, I am sure our debt will be much larger in 2040. What do you think will happen if the Fed stopped priming the pump? Do you expect the Fed to keep up this level of debt buying forever? Right now, the Fed’s balance sheet is almost twice the Federal Government’s annual budget, it is almost a third of the total Government debt. It will be interesting to see how long this can go on before we see serious inflation. I am not suggesting doom only a continued slide in the standard of living for middle classes and lower income Americans. We are not facing a collapse just continued escalation of middle class precarity.

This: “there are sound structural reasons to justify market expectations of low inflation and low interest rates. Furman and Summers point to increased saving driven by lengthening life expectancy and rising inequality, and also to decreased private-sector borrowing demand driven by changes in technology and corporate behavior. In fact, they consider a further decline in interest rates to be as likely as even a modest increase.” Sounds worse than higher interest rates. You can only get more saving from living longer if you work longer. Do you think rising inequality is a good thing and is it sustainable? If Furman and Summers are correct and they probably are we will need to retire later in life, work more years and still we will not close the gap between the middle class and the rich. The gap will only grow and more of the middle class will fall into the ranks of working class, never being able to own their own home or retire. Already there is much talk about how home ownership is becoming unaffordable.

I am not making a case for austerity I am making the case for raising taxes. Fighting the deficit by cutting spending is a losing battle, it hurts more than it helps. Tax and spend that is how you reduce the deficit. Carefully crafted taxes and spending boost the economy.

This is not always the case “Fiscal conservatives’ goal of shrinking the government until it is “small enough to drown in a bathtub” “ I am a fiscal conservative deficit hawk who want the government funded at a level that it can do what needs to be done and to do that well. Right now, and for decades that has not been the case because the fiscal conservative movement was hijacked by the supply sider greedy elites who just wanted their taxes reduced.

TEK