In a highly indebted world, austerity is a permanent state of affairs — Quartz

The logic behind austerity holds that “the market”—which the public had just bailed out—did not like the debt incurred when states everywhere rescued and recapitalized their banking systems.

Public debt, however, grew, because economies got smaller and grew slower the more they cut.

The reason is simple—and it is surprising anyone thought that anything else would happen. Imagine an economy as a sum, with a numerator and a denominator. Make total debt 100 and stick that on the top (the numerator). Make Gross Domestic Product (GDP) 100 and stick that on the bottom (the denominator) to give us a 100% debt-to-GDP ratio. If you cut total spending by 20% to restore “confidence,” the economy is “balanced” at 100/80. That means the debt-to-GDP ratio of the country just went up to 120%, all without the government issuing a single cent of new debt.

In short, cuts to spending in a recession make the underlying economy contract. After all, government workers have lost jobs or income, and government workers not shopping has the same effect as private sector workers not shopping. So the debt goes up as the economy shrinks further.

As difficult as it can be to make this reality part of the political conversation, public debt is an asset. Even at today’s low rates, it earns interest and retains value. No one is forced to invest in public debt, but every time bonds are issued investors show up and buy them by the truckload. By market criteria, public debt is a great investment.

But who pays for it? That would be the taxpayer.

Source: In a highly indebted world, austerity is a permanent state of affairs — Quartz