TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Ezra Klein said this about our deficit yesterday:

The rate on our treasuries will rise at some point. It might even change “on a dime,” as people like to say. It’ll be that change that forces us to do long-term deficit reduction. In the absence of that external pressure, we’re not going to do any serious deficit reduction (at least, not outside what we passed in health-care reform). Let’s be honest about that with ourselves.

Klein says that we won’t reduce the deficit until the financial markets force us to by demanding substantially higher interest payments for our debt, so until then, we should just borrow and spend as much as we can (to ostensibly stimulate the economy) until the party’s over.

I’m not quite sure where to begin here. (I’ll ignore his side comment that the healthcare reform bill reduced the deficit, which is absolutely false.)

First, this is an oddly fatalistic view for a guy who, earlier the same day, said this about liberals pressuring Obama:

…problems don’t abate simply because they’re difficult to solve, or difficult to get the votes to solve. Douthat writes that “technically, [liberals] could be right” that deficit spending would accelerate job growth, but it doesn’t matter because the votes don’t exist for it. I’m not exactly sure what this is supposed to prove, but I don’t think it logically follows that the people who might have the right idea about how to solve the problem should stop pressuring politicians to support that idea.

(Emphasis mine.)

Let’s address his initial argument, though.

So, Klein is arguing that because the politics of reducing the deficit are difficult, and the only thing that can fix that is investors demanding a higher rate of interest on our debt, we should borrow and spend as much as we can in the interim. The parents are out of town, so let’s eat as much candy and draw on as many walls as we can until they get back. We can’t help ourselves—we’re only kids, after all.

Klein’s argument (and he isn’t alone in this—read Krugman for a more bombastic version of the same argument) is that, because it is relatively cheap for the U.S. to borrow money at the moment, and we have a weak economy, we should be borrowing as much of it as possible and spending all of it.

This argument is ridiculous, and dangerous. While interest rates on our debt are low for both short and long-term debt, the debt’s principal does, at some point, come due.1 When it comes due, the U.S. can either pay it, or roll it over—turn it into new debt. If investors want to roll it over, they can demand a higher rate of interest on it.

If the U.S. follows Klein’s recommendations, our deficit will increase significantly, and our financial condition will worsen even further. Investors could, at that point, demand such a high rate of interest that we cannot afford to pay. At that point, the game’s over.

Krugman et al. would say this really doesn’t matter, because the U.S. can’t default. We control our own currency, and thus we can inflate it and pay any rate of interest we want. At that point, investors might choose not to lend to us. But worse, though, we could destroy our own currency. If you want to see inflation run wild, then you should throw in with Klein.

1. People who loan others money receive two payments: periodic interest on the loan, and at the end of the loan, the amount they loaned them. For example, if the loan is for $1000 for 5 years at 10%, the yearly interest payments are $100, and the loan’s principal is the $1000. [↩]