What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not \u201csave\u201d\u009d us half so much as monetary policy \u201d\u201c zero interest rates plus quantitative easing \u201d\u201c did. First, the impact of government spending (the hallowed \u201cmultiplier\u201d\u009d) has been much less than the proponents of stimulus hoped. Second, there is a good deal of \u201cleakage\u201d\u009d from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect<\/p>\n
For the world\u2019s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the \u201csafe haven\u201d\u009d of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.<\/p>\n
Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase \u201csafe haven\u201d\u009d. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.<\/p>\n
Even according to the White House\u2019s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years\u2019 time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That\u2019s right, never.<\/p>\n