We’ve already reached the point where we can’t stop borrowing money; if government borrowing stopped tomorrow, the lack of funds would trigger chaos. But logically the national debt cannot rise forever- eventually at 30 or 50 or 100 trillion dollars the government’s entire tax revenue will equal interest payments on the debt. So when is Doomsday at the current rate?
Looking at the national debt as some very large number is scary, but it doesn’t tell you much. Comparing the debt to GDP is more helpful. If the economy and the debt grow at roughly the same rate, it will be an long time before there are problems. If the debt grows faster than the economy for a sustained number of years, one is right to be concerned.
You do realize that US debt only promises to give you back little pieces of green paper (or more often nowadays a computer entry someplace) and the US government can make as much of this as they wish to do so, so there is no reason it would ever need to default.
It would only default if the resulting inflation were deemed as worse than the default.
I do realize it could default if it chooses not to honor its promises, but it would never be literally forced to do so. Things have changed from when a piece of US paper meant you could get 1/20 of an ounce of gold in exchange and their might not be enough gold.
It’s just numbers. It could be a googol $ debt. Inflation is wonderful like that.
It depends on the perceptions among people who buy the debt as to whether whatever instrument they’re being sold will be honoured, and the return they demand for the risk, or where we’re talking historic debt basically owed by the government to the taxpayer, what today’s taxpayers are prepared to pay. There’s no hard and fast theoretical rule, just human judgment at any point in time.
The debt is a big problem but it’s not a death sentence. The problem is a lot of people are comparing apples to oranges on the debt. They compare the total size of the debt with our annual GDP. (The OP avoided this by pointing out the distinction between the debt and the annual interest on the debt.)
The total debt is approaching twenty trillion dollars. But the annual interest on that debt is between four and five hundred billion dollars. Federal revenues in 2016 were well over three trillion dollars; not enough to pay off the debt but well above what we needed to keep up the interest payments. Theoretically, we could increase the debt to six times its current size and still pay off the interest within our current revenues.
Obviously we can’t pay off the debt in a single year. But the debt could be paid off over the course of several years. Let’s say we raised federal revenues by 25% - a high figure but not an impossible one. We keep all federal spending at current levels. We apply any surplus to paying off the debt.
First off, the new revenue level would be higher than current spending so we’d no longer be running a deficit. The debt would not be getting larger. The surplus would be around 250 billion a year. So we’d pay off the national debt in eighty years. A long period, yes, but not an eternity.
Let’s say we want to do it faster so we cut federal spending by ten percent and apply this surplus to the debt as well. The surplus would now be over 600 billion a year. With that, we’d pay off the debt in thirty-three years.
The observation of Little Nemo is correct. It is observed over longer periods of time - several years, not only a few - that the debt levels over 100 percent of the GDP can be a warning sign.
There is no reason for a nation not to carry some debt, just like there is no reason for a company not to carry some debt. It has an economic efficiency.
At the present the American debt to the GDP is it appears slightly over the 100 percent. There a a number of the OECD nations in this range. The additional factor is the taxation revenue to GDP ratio as this suggests the ability to pay the debt. The United States appears to be in the area of the 26% of the tax revenue to the GDP. This is low for the Western developed countries, most are in the 30-50 range. There is the evidence that the taxation rates where the taxation is over or it is approaching the 50% of the GDP is damaging to economic growth - but it is not a simple relationship.
The figures show that the United States if it made the political decision to, could without great stress in raising the taxation rate (by the higher rates, by the tightening of the collection, whatever) as the share of GDP to percentages common in the western wealthy countries, easily begin to pay down its debt.
For a country with such debt to GDP ratios (100% plus) and already high rates of taxation, there is maybe more cause to worry. But for the United States, from the objective economic figures, there is no reason the United States can not handle and without even changes in the current expenditure begin to reduce the debt stock.
This is called “the ability to repay.” It is objectively clear that there is ability without any recal economic stress.
Of course for the internal political decisions that can effect what is called “the willingness” and there maybe you are in danger.
Edited to add, at the current debt levels, it is, however, not a very excellent idea to increase the rate of the indebtedness. the rational economic programme would be seeking for the gradual economies in the paydown of the debt (as the rapid changes in the spending are the shocks to the system and this is unless in crisis not a good idea).
If I could add something from the Canadian perspective:
When Canada went through its major debt/defitict wrangling in the 1990s, there were two different things driving it:
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The risk that there would not be purchasers for Canadian debt, which could trigger, not default, but sudden major re-allocation of resources just to service the debt; and,
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The cost of servicing the debt began to interfere with the ability of governments to choose what public programs they wanted to provide.
On the first point, as the OP has noted, governments with outstanding debt will roll over that debt; as a series of Government bonds comes due, it will offer new bond series to bring in revenue to retire the old one, and so on.
But the federal government had a “near-death” experience in the early 1990’s: it put up a major new bond offering, and as the clock was ticking, no-one was buying it. It was only about 15 minutes before the proposed close of sale of that bond series that a major investor bought it on the market. That was a real warning sign to the federal government. If that series hadn’t sold, it likely would have triggered a major down-grade in Canada’s bond-rating by the rating agencies, because if the market isn’t buying your bonds, that’s a clear sign of trouble. That in turn would make it harder to sell the next series, triggering a vicious downward cycle.
If that series hadn’t sold, it wouldn’t have triggered a default, but it would have meant that the federal government would have immediately had to find the money internally to retire the old bond series. The federal government has a lot of resources and could have done so, but at the expense of drastic and sudden cuts in government spending on other matters, freezes on salaries, and so on - the rapid changes in spending Ramira refers to. It would have been done, but it wouldn’t have been pleasant.
That was a wake-up call for the feds and they shifted to a major cut-backs and re-structuring programme. It worked. The federal government and the provinces both brought their spending under control, going from one of the worst over-spending countries in the G7 to the most disciplined.
On the second point, even setting aside that near-death experience, the federal government and especially the provinces were finding that the cost of servicing the debt was becoming such a large proportion of the budget that it was hampering their abilities to develop new programmes, change government policies, and so on. Literally, the policy choices of the previous generation were hampering the ability of the current generation to govern as they saw fit. That’s an untenable situation: governments have to be able to respond to new issues and social problems as they come up, but increasingly, their hands were tied to service the debt commitments made by previous governments. That too was a wake-up call, although a less dramatic one than the bond-issue question. It pushed the governments into a major re-structuring.
Also, cui bono: who is getting this interest money? The effect is a transfer of wealth upward, benefiting the rich (those who can lend money) at the cost to everyone else.
This is in addition to the cutting of available funds to pay for programs that benefit everyone, the wealthy included, but mostly benefiting the non-wealthy. So the non-wealthy are harmed by large interest payments in two different ways.
This is a primitive, simplistic and almost 100 per cent inaccurate analysis of a national debt.
In all countries large amounts of the public debt are held by the retirement and the pension funds.
For united states, the majority I find is held by domestic holders in 2016 and of these the majority is by the public entities and the retirement or the public funds.
For the government that issues the debt in its own currency, it has always the option of dilution although it is not a great one usually.
to carry the very high debt to GDP ratio (what is high, it would seem for developed countries over the 100 percent) while also having the high taxation to GDP ratio outside of the crisis times is dangerous as it does not allow for the flexibility to respond to crisis except through a brutual austerity.
True, but the deliberate creation of inflation high enough to really reduce the ‘real’ debt would be
a) a kind of default, if we don’t stick to form over substance too much
b) harder to do than some people who mention it seem to imagine
If all the US debt were 30yr bonds, the market bought them all with low inflation expectations of say 2% (like now), then the govt (or its effective agent the Fed) could generate 10% inflation, then hah, hah the joke is on the bond buyers and the real debt could be radically reduced, though ignoring all the other negative effects of the inflation.
But in the real situation where the average maturity of the debt is more like 5 yrs, that wouldn’t work nearly as ‘well’. As soon as the market realizes the govt is going to deliberately stoke inflation, it will demand far higher rates on any subsequent bonds, probably high real rates relative to the newly higher inflation, to compensate the risk of more such shenanigans. And that bill is now coming due in only 5 yrs on average.
Russia essentially defaulted on Ruble debt in 1996, and didn’t actually default on some forms of USD debt (though also effectively did on others). The cost to the local economy, plus the catch up game of the market demanding far higher rates once it realized the issuer was inflating on purpose, was judged greater than the disruption of just forcing existing holders to exchange existing debt for longer debt with worse terms. About which a layman might also say ‘oh but that’s not exactly a default, a default is where you just don’t pay’. But actually not. Rating agencies deem a forced exchange like that as a default, whereas they would not in general deem deliberate inflation to be a default. IOW the distinctions are technical.
IMO a forced haircut on debt of highly indebted rich countries, including but not limited to the US, is fairly likely in coming decades. And it could be that once that precedent is set in a major economy (more indebted ones than the US, like some in Europe or Japan) it becomes gradually more accepted: ‘Let’s get real, this debt can’t be paid back at real value, and why create an inflation mess trying to hide that fact? Anyway by and large rich folks and foreigners* are the ones holding the debt’. I could see that idea gathering a populist following at some point, and again especially if it happened one place and didn’t cause a complete meltdown.
*who are at least partly immune to taxation policy which just takes the money away from them in taxes for the govt to pay back the debt that way.
Not only is this inaccurate, it was explained in a previous thread why, to which you had no response, but now you just repeat it anyway.
In rough terms the US debt has a maturity of around 5 yrs. The 5 yr inflation adjusted US security has a real yield of approximately zero (.125% TIPS of April 15 2022 were yielding 0.1% real on Friday). The holders are getting nothing in real terms, the govt is paying nothing in real terms. The erosion of the debt by inflation (considering the non-inflation adjusted debt) is just about offsetting the interest.
So we don’t even have to debate who actually holds the debt, they aren’t getting any real return on average in current conditions, which have persisted now for awhile. And in fact the realized return on US debt as it worked down the very high level of debt to GDP the few decades after WWII was also negative in real terms.
In a future situation where holders began to lose confidence in US ability to repay, real returns might become significantly positive and then there could be a debate about paying rich people and foreigners when ‘we’ can just stiff them, ‘and that’s only fair’ (see my post above). But you seem to think this is true now, which it isn’t.
I think a more significant factor is that about a third of the national debt is owed to foreign investors. Every year we’re transferring around a hundred and fifty billion dollars out of the American economy into foreign economies. That’s more than triple our official foreign aid budget.
Sometimes, it’s okay to let a topic drop, rather than go back and pick at it like a bad scab. Not responding is not the same as “having no response.”
We’re paying money to the lenders. That’s almost tautological. Who the hell else would we pay interest money to?
The lenders are not “most of us.” Lenders are often banks, and banks have stocks and shares, and the people who own those stocks and shares are not “most of us.” But all of us pay the taxes that go to pay those interest rates.
So, no, you have NOT shown that it is inaccurate that we are all paying money upward toward the richest people, not only in the U.S., but foreign investors too. So it’s not only bad demographically, it’s also bad for the overall balance of payments.
If this is wrong, show us all how and why. Start with whom the payments are actually going to. Hint: it ain’t the taxpaying poor.
In return for…?
This shows you have not any understanding of bonds.
The interest on the government bonds are paid to the bond owners.
The large majority of the bond owners are either the other state entities of your own govenrment including your Social Security fund or the retirement funds and the pension funds, so you are paying a current income to the retired persons as it is the older near retirement and the retired whose retirement funds and the pensions are balanced to the government debt.
Here we understand you do not understand bonds and confuse them with Banks.
Well it is a dialogue of the deaf since you refuse to learn as your “hint” shows.
Or another alternative to ignoring the point is respond to it without addressing it at all. 
And I don’t think it has to be explained again to ‘us all’ in a lot more detail, just people not thinking about a basic point in finance.
In the current and recent situations of most rich country govt’s including the US, inflation in their currency is about as high or higher than the nominal rates they are paying on the bonds. Accounting wise they are paying interest. But in real economic terms the purchasing power of the principle, a proxy for the difficulty in raising that much nominal money in taxes, is declining at the same or even a greater rate as the interest. Holders are therefore getting around nothing in real return, and it’s therefore not important to consider who is paying whom, because in real terms basically nobody is paying anybody.
But think about an easier example if you still can’t grasp that point. Most German govt bonds now pay a negative nominal rate (and there’s still slight inflation). Who is money being transferred to in that case? But only real return matters. If the real return is negative the net real transfer from public debt is from holders to the public. And that’s the general situation of rich world public debt now, or anyway it straddles the zero point and in US case is very close to it on average across various maturities of debt weighted by how much is outstanding.
All sorts of things.
For example: Wealthy Chinese buyers are a growing force in U.S. real estate markets
Thank you for your insulting response.
So the government is just paying money to the government? No individuals have any stake in bonds? What an absurd idea.
The actual people who benefit from payments on the national debt are not poor and not very often middle class. The institutions that benefit are, ultimately, owned by individuals, or by partnerships of individuals, or by corporations that have shares owned by other corporations, and eventually (when you untangle the chain) by individuals.
You’re playing a shell game, but there are people at the bottom of it. It is not turtles all the way down.