Free «National Debt Versus Economic Growth» Essay Sample

The topic of this assignment is to describe how the developed countries could deal with reducing national debts while they still maintain the economic growth that is always evident in these countries especially in the industries and also the agricultural sectors. It is very possible to do this through different means that we will explain in this assignment. An economic growth of a country can continue to grow as the developed country continues to operate on national debts.

In the past, the industrialized and developed countries have lived beyond their means. During these times including the good times, the government budget deficits persistently continued to increase and expand. The banks are left to speculate with borrowed money (The Economist 2009 p, 1).

Governments of the developed countries always come into rescue in order to put an end of the unfettered spending with very large sums of money. This guarantees savings to the citizens and this is also done through huge stimulus programs from borrowed money. These debts are so huge for example the national deficits of thirty members of the OECD meaning Organization for Economic Cooperation and Development, have increased sevenfold from2007, to approximately $3.4 trillion today. The total burden adds up to $43 trillion. On the other hand, the national deficits in the euro zone have also increased 12-fold and the accumulated amount adds up to $7.7 trillion in debts (Magazine, economist 2010 p, 3).

The first strategy to reducing the national debts without affecting the economic growth involves embarking on strict course of austerity measures by the national economies.

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This strategy will involve demanding higher taxes from the citizens.

The other strategy involves limiting the government spending. For example Ireland has taken up this strategy where the government has cut down the pay to the civil servants by about 7.5% on average. The recipients of the social welfare have seen their benefits from the government being cut down. These efforts are exemplary because the economy of this country will not be affected. The monetary policy could also be used to control the supply of money, the availability of the money and the cost of the money or the rate of interest in order to attain set objectives that are oriented towards stability and growth of the economy (Sloman, 2007 p, 26)

The government is also faced with huge pressure to consolidate the resources that are available. This involves putting money aside just for the use of settling debts. The United States followed this after the Second World War in order to eliminate the debts that were outstanding at that time (Mankiw, 2008 p, 19). There were many years of deprivation and the government was able to consolidate the extra money to settle debts and after these years were spent, there was strong economic growth.

Inflation could also be used to offset the national debts.

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By the government printing more money in the process referred to as firing up the money printing presses hence devaluing the currency. This leads to high inflation and when the prices increase, the government is able to collect extra revenue. This extra revenue improves the ability to reduce the national debt. The value of the debt keeps declining everyday from the payments that are made and from the effects of inflation. The Nobel Prize winner, Paul Krugman advised the President of United States to use this tool that would involve moderate inflation and vigorous growth before using the other measures. It proved to be successful ((The Economist 2010 p, 25).

There is also the approach referred to as quantitative easing which entirely helps to keep the interest rates and returns low. For example in the United States, the American central bank and the Federal Reserve have been able to avail a modern version of money printing. It only spends hundreds of billions of dollars in order to buy up the government debt especially in terms of treasury bonds. This has helped to offset the national debts while still maintaining the economic growth (Sloman, 2007 p, 29).

However this approach has its own disadvantage. The questions that economic planners ask themselves are how, when and to what extent that the government will be able to recollect the cash with which it will have flooded the markers with. If it is tackled well, all the capital in the marketplaces could stimulate the demand to high degrees such that during the next recovery the prices would increase dramatically. In case this would happen, the debt would be reduced through inflation (Mankiw, 2008). The foreign investors and savers would be partly expropriated and would end up at the losing ending of this approach ((The Economist 2009 p, 42).

The inflation is quite hard to manage and can spin out of control very easily. For example, Germany in the years 1922 and 1923 had hyperinflation that led to bitter experiences with explosive consumer prices. Adam Smith back in 1776 pointed out that there was need for a laid out and legal system in order to deal with the national debts to avoid bankruptcies. This should be least hurtful to the creditor and also least dishonourable to the debtors.

The use of fiscal policy can also lead to the reduction of the national debts that may exist. The government's objectives for the fiscal policy should remain unaltered: and these include over medium term, to ensure very sound public finances and that taxation and spending impact in fair means between and within generations. In the short term, supporting of the monetary policy and especially allowing the automatic stabilisers to offer help in smoothening of the path of economic development. The fiscal policy should be timely, targeted and temporary so that it could lead to reduction of national debt and also especially to maintain the economic growth in the nations that are involved (Sloman, 2007 p, 33).

As a conclusion, the huge public debts have always had significant real and financial consequences. Countries with a weak fiscal system and a very high degree of the dependence on other foreign investors to finance the deficits in their countries often face huge spreads of their debts. It is therefore necessary to use the approaches that would suit the economy levels of the industrialized countries.

It is very important to reduce the national debts and at the same time maintain the economy growth of the countries. Though there are negative attributes that relate to the approaches that we have discussed the economic planners of the involved nations should be able to weigh all the options and use the best approach that favours their country. This may be in relation to the economy levels, amount of resources available and the time that they need to pay all the national debts. The reduction of the national debts while maintaining the economic growth is possible ((The Economist 2009 p, 49).


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