The continuous budget deficits of the 1970'a and 1980's produced a very large public debt (in excess of $2,000 billions in early 1990's). Economists argued whether the debt affects current (crowding-out-effect) and future (necessity to repay the debt) economic conditions. The most undoubtful impacts were the need to service the debt (pay interest) and the external threat from foreigners who own a large proportion of the debt and thus are able to affect the exchange rate of the dollar.
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The stock market crash of October 19, 1987, was in part attributable to the large public debt (in the opinion of some economists). The reason for this was the need to offer higher interest rates to refinance the debt which caused inflation to pick up. Higher interest rates decreased the value of financial assets and prompted investors to sell, which drove prices further down. |
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