Deficits and debt (continued)

In an earlier post ("Brooks, Burke, and Hamilton," Jan. 28), I wrote that David Brooks (in one of his recent NYT columns) had not given a particularly good explanation of how and why rising U.S. deficits and debt-to-GDP ratios would be economically harmful.

Today I happened to catch on the radio a bit of Fed Chairman Bernanke's speech at the National Press Club (full text here); the part of the speech I heard addressed fiscal policy, deficits, and debt. Bernanke did a somewhat better job than Brooks of explaining why high debt and deficits are unsustainable, but even Bernanke's explanation I found too cryptic and thus less than satisfying. After citing Congressional Budget Office estimates of what will happen to debt and deficits in the absence of major legislative policy changes, and after pointing out that the aging U.S. population and rising health-care costs are the underlying main drivers of projected rising deficits, Bernanke said this:

The CBO's long-term budget projections, by design, do not account for the likely adverse economic effects of such high debt and deficits. But if government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, causing further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult. (emphasis added)

Take the sentence I've highlighted. High rates of government borrowing, the first part of the sentence asserts, would drain funds from private investment (presumably what is meant is productive private investment, e.g. in business expansion), but the mechanism involved is not spelled out. Turning to the second part of the sentence, it is not very clear to me how "increasing our debt to foreigners" will adversely affect "U.S. output, incomes, and standards of living." I'm not saying this is wrong; rather, I'm saying that in a public speech by the Fed Chairman at the National Press Club it would have been nice to have more of a real, step-by-step explanation instead of simply an assertion, which is pretty much what the quoted passage amounts to. The stuff about the vicious circle of lender unease leading to rising interest rates (to attract continued purchase of debt instruments) leading to still higher debt ratios does not really count as an explanation, either. Maybe the recent reports of the several deficit commissions contain explanations, but chances are I won't have time to read them.

P.S. In a comment on my earlier post, Hank suggested that the debt/deficits are ultimately unsustainable because the government cannot print money endlessly to meet ever-increasing debt service obligations. To do so would raise the specter of either possible hyperinflation or a default crisis. At some extreme point this is undoubtedly true, but Brooks and Bernanke have not couched their warnings in these terms, at least not explicitly. Rather, their point is that, well short of a default crisis, the deficits and debt have harmful effects, and that's the assertion on which I've been focusing.