Does the debt have a time limit?

This is inspired by my musings over Bricker’s thread concerning Obama’s caving to Republican demands on tax cuts for the wealthy.

I was thinking that I can accept BHO’s tax compromise. He isn’t prejudiced against the rich. His proposals aren’t geared toward doing them in. He just wants what is best for the American people. We are still recovering from a recession. And apparently there are jobs on the line- though that remains to be seen. He never said when he’d end the tax cuts AFAIK…

In any case, the compromise increases the national debt. This got me to wondering about my own complicity- how long can this go on? If the debt continues to get bigger, are there tipping points or thresholds after which the shit hits the fan? Like, at* x dollars does the interest rate spike, suddenly jacking up our debt maintenance payments? Or will some major investor bail at y *dollars? At z dollars does the cost of borrowing increase? Or some other scenario that isn’t obvious to a non-expert in global finance? Is there a definable ‘ticking time bomb’ aspect to the debt; or can it just keep growing forever?

I don’t know, but I suspect the answer is debatable. As always I will defer to the wisdom of the mods if this thread needs to be moved to GQ or whatever.

Not really. The amount of debt a country can bear is pretty situation specific. Britains gone as high as 300% of GDP and then paid it off, while Spain’s at 40% and in trouble. Occasionally someone will come up with some random “magic number” and claim that thats the point where all of a sudden investors will abandon you, but thats a little silly. Investors aren’t stupid, a country with a large debt but growing economy and small deficts is in much better shape and can sustain more debt then a country with a small debt load but very large deficits and a shrinking economy.

Obviously your debt can’t go to infinity, at some point your interest payments will consume your budget. But previous to that, there isn’t any “fundamental” limit. You can keep borrowing for as long as you can convince investors you can pay it back.

You have to pay the vig. That increases the deficit unless you cut spending or increase revenue. Obama increased spending and decreased revenue, which increases the deficit, which has to be covered with more debt, and more vig. It’s not a time bomb, its a snowball. And it doesn’t stop rolling until we spend less or increase revenue, or no one lends us money any more (which at least makes spending drop off rapidly).

Rogoff and Reinhart observe that when debt/GDP exceeds 90%, then growth tends to be repressed later on. But that tends to happen in countries recovering from financial crises, which themselves crimp economic growth. The 2 effects haven’t been sorted out.

Most countries owe part of their debt in a foreign currency. So if their currency undergoes rapid depreciation, their debt burden increases. This doesn’t apply to the US: if the US dollar collapses, foreign owners of US bonds will take the hit, not the US.

A preferred metric for sustainability is apparently interest on the debt as a share of revenues. Here is one article by a sane but hawkish analyst:
http://www.thefiscaltimes.com/Issues/The-Economy/2010/09/03/Options-for-Ending-Unsustainable-Debt.aspx

I would suppose that if the growth in interest payments exceeds growth in GDP, then you have a sustainability problem. Stein’s Law is worth a mention: “That which cannot go on forever will stop.”

Yes, there is a time limit, and it’s the exact same as the one on your debt: time is up when people stop lending you money; or more precisely, time is up when people stop lending you money at rates you are willing to pay. When that comes, exactly, nobody knows – in the same way you, as a consumer, won’t know you’re tapped out until you go to the bank and they tell you they won’t lend. Credit scores and the like can give you an idea, but they are not definitive.

As Measure for Measure notes, debt nearing 100% is historically a pretty big benchmark. But as Simplicio notes, the UK was almost three times that at the height of their empire. Nobody knows for sure.

One important thing to note, though: Whereas most consumer debt is fairly long-term (30 year mortgage, 5 year car loan, revolving credit card where terms aren’t usually altered), much US debt is short term, held in three- and six- month bonds that have to keep getting resold. Imagine needing to refinance your car every six months. Would make you a bit more nervous about keeping you budget balanced, wouldn’t it? Not if you’re a politician and it’s someone else’s money …

If the shit does hit the fan w/r/t the national debt, it will do so pretty quickly.

The government has a much better idea than an individual, simply because the government sells bonds with great frequency plus you can see the price of bonds on the secondary market. For example, the Fed sold 3-year bonds on Tuesday, 10-year bonds yesterday and it is selling 30-year bonds today. Most bonds are sold by auction, so they instantly know what people are prepared to pay.

The market has reacted to the tax deal by lowering the price they will for pay bonds (thereby increasing the yield) because it expects the tax deal so stimulate inflation resulting in increased interest rates down the road.

The debt position is very much prone to interest rate changes. The cost of servicing the debt has fallen in recent years even as the size has increased, because interest rates have fallen dramatically. Paying the interest is currently the fourth biggest item of government expenditure. If interest rates soar (which is not unreasonable given their current low levels), debt servicing would become the biggest expense.

Debt is deferred taxes. Increased taxation harms economic growth. All debt will hurt future growth. Perhaps the taxation is less harmful if the money is used internally, but debt combined with trade deficit is a double bad. Then future resources that has to be allocated to paying off debt and interests on debt is send out of the country. In addition debt will harm growth because it pushes up interest rates, and increases financial insecurities.

And what would that look like?

Was that intended as a continuation or a contradiction of what I said? I don’t disagree with any of it.

Nobody knows for sure, and anyone says they do is full of crap.

Maybe massive austerity. Maybe we default. Maybe we try printing our way out of it and have 10% inflation for a decade. Maybe some combination of the above, or some other nightmare. If we reach the point where investors no longer want to finance US debt, all we can be sure of is there will be massive change, and it will not be pleasant to live through.

Of course, maybe none of it happens. Maybe some new technology emerges that causes the economy to run at a 1990s level for the next 50 years, we spend responsibly, we grow our way out of it, and our grandkids wonder what we were so worried about. Not the way I’m betting, but certainly possible.

It was stating that with respect to your statement “When that comes, exactly, nobody knows”, while we do not know now when it will occur, if/when it does it will not come as a surprise (unlike your customer walking into a bank scenario) because the government can see the trend on its bond prices every day.

Ah. Well, I take your point, but what I was getting at was that it can change fairly suddenly. Not literally overnight, but in the same way that bear markets can turn into crashes in a few hours, I’d contend that we could easily see bond markets change completely in a matter of a few weeks. One big investor drops out, then a few analysts say to leave, and next thing you know a rush is on.

I certainly agree that changes can happen in a matter of weeks. There can be a huge amount of inertia until there is a change in sentiment which sends things cascading in the other direction. Just look at how the major banks viewed the bonds based on sub-prime mortgages. Everything is fine, everything is fine, everything is fine, OH MY GOD!!!

Soo… in the depths of the crisis, treasury bond rates dropped down to like .1% or less. Now they are rebounding to rates of around 3%, so on $14 trillion we’re talking $420 billion in annual interest. But now the debt looks headed to $15 trillion, and if treasury rates climb up around 8% like they have in Ireland, then the US is on the hook $1.2 trillion a year.

So here’s another question: are the secret parties who fund Republican (or maybe all) candidates to force our debt ever higher (this time via tax cuts for the rich) the same parties who will be collecting all this interest? Because while that kind of hole in the budget is going to be disastrous for everything but defense spending in the US, somebody overseas will get very rich.

Is that the plan then? Hijack the government to drive up the debt, then start collecting 8% on multi-billion dollar investments?

If these guys already secretly control the government, why would they want to bankrupt the government? They own it, after all.

I would think a more likely reason the rich want tax cuts for the rich is because the rich don’t want to pay taxes.

Funny you should say that. I am increasingly convinced that the next big engines of economic growth will be (legalized) drugs and gambling.

Well, they don’t take power until January. And the point isn’t bankruptcy, merely a crisis to drive up the treasury yield. It’s probably not the case and will calm me to see the notion debunked.

That for sure, but keep in mind if taxes go up for the rich then they are funding their own treasury returns in this scenario. The idea is to magnify profits by getting everyone else to pay those.

It’s very unlikely the USA would allow its credit rating to fall below AAA, what happens is services or new projects are farmed out to private enterprise who can borrowing billions of dollars of private debt without creating any new public debt,the problem is when risky projects get a government guarantee they will pick up the pieces if a project goes wrong.

Nope. Changes in bond yields do not affect the amount of interest the government pays on its existing debt. If treasury rates climb to 8% then the US is not on the hook for anything it wasn’t on the hook for already. If rates reach 8% and the US decides to borrow another gazzillion dollars next year, then it will pay 8% on those gazzillion dollars until they are repaid.

On the existing debt, the government pays interest at the rates in place when the money was borrowed.

Of course, rising interest rates are a real problem for US taxpayers, because the US government is going to keep borrowing as much as it can as long as it can.

Well yes. A 30 year bond keeps its rate. But the debt is getting so large that paying it off in even 30 years is starting to look unlikely.