Re: Does Debt Matter

[Harry Veeder <aa361@xxxxxxxxxxxxxxx>]

On Wed, 29 Oct 1997, William F. Hummel wrote:

> Per Berglund  wrote
>
> >William asked:
> >> (1)  If debt does matter, what are the negative implications and how do
> >they develop as a function of increasing debt/GDP ratio?
> >
> >Per:
> >I see both positive and negative implications. The public debt can be too
> >small and it can be too large -- there is a hump-shaped relation, I think. I
> >reckon this question is about the zone where the debt is too large, and the
> >problem with too large a debt is that it will fuel too much aggregate
> >demand, which will cause inflationary pressures.
>
> William:
> The connection between aggregate demand and size of debt is not
> at all clear to me.  Also the assumption that increasing
> aggregate demand will necessarily fuel price inflation needs to
> be explained.  Why cannot supply grow apace with demand under the
> assumed conditions?

Let me try this. A "high" national debt/GDP ratio pushes national
(aggregate) demand ahead of national (aggregate) supply. Inflation is
a natural consequence of demand exceeding supply. Inflation says, "restrain
your demands!".

Harry Veeder