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hasn’t resulted in an inflationary surge (core inflation measured over 3 months just came in below 2%), so why not keep
doing it? Aren’t these charts amazing?

Rising Federal debt? No problem for Treasury markets
Percent of GDP Yield, percent, 90 day moving average
80% 4.8%
75% 4.3%
70% 3.8%
65% 3.3%
60%
55% 2.8%
50% Debt to GDP 10-year Treasury yield
45% 2.3%
40% 35% 1.8%
30%
Sep-04 Feb-06 Jun-07 Nov-08 Mar-10 Aug-11 Dec-12
Source: CBO, Bloomberg. Assumes CBO Alternative Case for estimates.

Rising Fed balance sheet? No problem for inflation
Percent of GDP Percent change, YoY
20% 4.0%
18% 3.5%
16% 3.0%
14% 2.5%
12% Core CPI 2.0%
10% 1.5%
8% Balance sheet 1.0%
6% 0.5%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Federal Reserve Board, Bureau of Labor Statistics.

They are amazing, but no one knows how long they can be sustained. Even Summers and DeLong concede that “even if it
is granted that the stimulus can be both timely and temporary, the question of how large it can be while preserving these
attributes remains for future research”. If one of these trends could not be sustained, my guess is that it would be fiscal
constraints rather than monetary ones. While it’s great to see rising Federal debt not adversely affecting Treasury
markets, the chart on the left reminds me of The Day of the Triffids.

What is The Day of the Triffids?
It’s a 1951 science fiction novel. There’s a meteor shower, and most people go outside to look at it. The next morning,
everyone who looked at the meteor shower ends up blind, and Earth is taken over by giant man-eating venomous
plants. The point: some amazing events which look benign have unforeseen consequences. Will a pact of going for
growth pay the freight of higher Federal debt in the long run? Hard to say; there are not a lot of examples to draw
from. Economic theories and their associated debt bubbles don’t always work out as planned [a]. After WWII, the US
also faced a debt ratio of 80% of GDP. Austerity was not the answer back then; government receipts and outlays as a %
of GDP did not change much during the 1950’s, and net debt was flat. So how did US debt/GDP fall from 80% to 46%
in just ten years? Robust annualized real growth of more than 4.0%, and 2.0% inflation. However, unique economic
conditions and productivity gains of the 1950’s (e.g., interstate highway, rebuilding of Europe and Japan) may not be
repeated, and the country was not headed into an entitlement time bomb. If the US does not experience a
growth/productivity boom, the burden of higher debt could last for a generation or more. A pro-growth Administration
would probably help, but the difficulty lay in defining exactly what that means.

Isn't it amazing?
[Image of starry night sky/meteor shower]

1950's debt reduction was based on growth, not austerity

Net debt (% of GDP) | Net debt (bn) | Nominal GDP (bn) | Real GDP (bn 1950 USD) | Outlays (% of GDP) | Receipts (% of GDP)
--- | --- | --- | --- | --- | ---
1950 | 80% | $219 | $273 | $273 | 16% | 14%
1951 | 67% | $214 | $320 | $302 | 14% | 16%
1952 | 62% | $215 | $349 | $322 | 19% | 19%
1953 | 59% | $218 | $373 | $341 | 21% | 19%
1954 | 60% | $224 | $377 | $343 | 19% | 19%
1955 | 57% | $227 | $396 | $354 | 17% | 17%
1956 | 52% | $222 | $427 | $368 | 17% | 18%
1957 | 49% | $219 | $451 | $377 | 17% | 18%
1958 | 49% | $226 | $460 | $377 | 18% | 17%
1959 | 48% | $235 | $490 | $398 | 19% | 16%
1960 | 46% | $237 | $519 | $415 | 18% | 18%
Comp. ann'l gr: | | 0.8% | 6.6% | 4.3% | |
Source: OMB, BEA.

Are there debt vs austerity parallels at the state and local level?
Yes and no. At the state and local level, over last decade, more than 1 trillion in unfunded pension and healthcare (OPEB)
related liabilities were recognized (they were accrued over a longer period). Even these “as-reported” estimates, which

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