All Western governments have a huge deficit and huge debts. Somebody will have to fill the gaps.
This is common wisdom. You are certainly not alone in thinking this. In fact the majority think this way. It is wrong however. But that is not to say that debt does not matter; it does matter! But the way of thinking about it is nowadays entirely wrong, whereas in the past it was not wrong.
Greenspan eluded to this incorrect thinking when he addressed Paul Ryan's question regarding the soundness of the U.S. Social Security system. Greenspan correctly described the real problem, and in doing so corrected Ryan without Ryan realizing it, or even understanding Greenspan's response. And here I will have to paraphrase Greenspan's remark because it was quite some time ago now. Greenspan said, in effect, the concern was not Social Security, but whether the growth of U.S. assets could keep pace. Greenspan had a peculiar way of saying things without anyone in earshot grasping the real meaning of what he said. I think it was a learned behavior on his part.
Another time before the Senate Banking Committee, when asked if the Social Security "Trust Fund" contained anything other than worthless I.O.U.'s, Greenspan responded, and again I am paraphrasing, "if what you are asking is whether the Trust represents claims against real assets, it does." This naturally produced a blank look in response. "What Greenspan meant in both these responses, was that there was no possibility of Social Security going broke or the U.S. not being able to pay on its debt owed to future retirees, or any other creditors for that matter. If however U.S. productivity can not keep pace with U.S. government liabilities than the buying power of these claims on assets will decline. Or in plain English, it is the perception of a currency's buying power relative to other currencies, and the real inflation* that can result when it is perceived that the buying power is declining that is the danger; not ability to pay. And the perception is to large extent a reflection of productivity. Ultimately, of course, inflation depends on more than perception alone, but on whether the actual growth in total assets (some total of products and services produced plus natural assets) can keep pace with the rate at which claims on these assets (dollars) are issued.
Our thinking is stuck in pre-1971, Bretton Woods Mode. And that is the problem; not debt per se. There are three kinds of money: commodity, credit, and fiat. We no longer use commodity money. Credit money represents a liability. Fiat money is money created on the spot. It can be a notation in a computer file or on a piece of paper for example.
Fiat money is very scary to most people, but it is vastly superior to commodity money, far more flexible, and thus far more useful. It is backed by the sum total of assets against which claims may be made and by taxes. The latter gives fiat money value because it represents a credit that may be used to pay taxes owed to the sovereign issuer of the fiat money. The soundness of a fiat currency is naturally a function of the soundness of its management. In the United States the issuance of fiat currency is managed jointly by the Treasury and its pseudo independent Partner, the Federal Reserve Bank. The quality of this management in the U.S. is outstanding and has served as the model for responsible management for the rest of the world. Both the strength and weakness in the U.S. model lies in these two highly capable Institutions being ultimately responsible to the U.S. Congress.
Nowadays the only thing we need to be concerned about is whether we are creating fiat money faster than productivity is growing and/or slower than our natural assets are depreciating. The value of Assets is not constant, nor is the value (buying power) of claims against them, so it makes no sense to talk about, or think about, debt in the way we did when we used commodity money which represented claims against an almost fixed amount of commodity at a constant price.
This problem of incorrect thinking is even worse in Europe. The Germans in particular can be faulted for this.
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*In floating currency markets, real, current buying power trends, i.e., inflation rates, along with current and anticipated geopolitical events, influence the perception of what will happen over time to the buying power of one fiat currency relative to another.
