By Simon Johnson and James Kwak
For many commentators, the only possible response is immediate austerity – the course being taken in Britain and parts of the euro zone. Already the national debt is being used as a hammer to beat down any proposed government spending, no matter what its merits. If we continue to spend, the argument goes, markets will lose faith in our ability to repay our debts, interest rates will skyrocket, the dollar will collapse and our way of life will be at an end.
While this argument is plausible in the abstract, there is no reason for panic. For starters, the Treasury Department can currently borrow money at historically low interest rates. This is no surprise. Investors around the world like saving in a safe currency, the dollar has traditionally been seen as the safest of currencies and recent developments in Europe and the rest of the world have done nothing to change that.
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