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By Jason Stipp and Robert Johnson, CFA | 11-07-2012 01:00 PM

Can We Tackle the Deficit Without Courting Recession?

It's possible to address the deficit while still maintaining economic growth, but swallowing the whole fiscal cliff at once would be too much for the economy, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar.

Now that the election is behind us, market watchers have turned their attention to some of the pre-existing economic problems that our country faces, including the debt and deficit.

Here to talk about some of the work that we need to do there is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: We hear a lot about debt and deficit as being a big problem, but I'm not sure that a lot of folks understand exactly why. We've carried debt and deficit for a while; why is this an issue that we eventually will need to address?

Johnson: With debt, it's just like an individual going into debt. A certain amount of debt is good; it lets you have things a little bit sooner than you otherwise would. It helps the economy a little bit. If you have a pay-in-cash economy, it's not an all-great thing.

But on the other hand, you get too much debt, and all that you're doing is paying interest and you haven't got any money to buy anything else, and plus you always have to be able to roll that loan over. And then you have to think about, what price am I going to have to pay for that loan? And the bigger the deficit, either for an individual or for a government, the more you pay. And that's some of the problem they're having in Europe right now. You keep hearing, well Italy's interest rate is now up to 8% because of their deficit problems. That's what they're worried may happen with the U.S. deficit at some point.

Stipp: Can you put our current debt and deficit into context? How has it grown over time and where are we now? How do you measure that?

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