I’d like to get some clarification from the “Deficit Hawks” here. Is there a certain percentage of GDP held in debt that gets crossed where it becomes completely unacceptable to take on new debt? How do we determine how much is too much?
When Greece was going to shit, there was a lot of talk about how their debt passed a certain threshold as a percentage of GDP. It was then pointed out that the US dept to GDP ratio was really close. I’m going to try and dig up the two numbers.
Two things to keep in mind that are unique to US Debt:
[1] It’s in US currency. Most Americans either don’t consider this, or don’t realize what that means. Other countries have debt that is not in their own currency. As a result, the loose monetary policy devalues their own currency, which has the compounding effect of increasing their debt. ie Let’s say that Zimbabwe takes out a $1million USD loan using $1mil of their dollars, and that devalues their currency to 90cents, the loan starts to go up to $1.1mil. But as the loan goes up, their dept to gdp ratio gets worse, which further devalues their currency, increasing the debt. This can’t happen in the US, because their debt is in US currency.
[2] Most of the debt is actually held in the US, and at least for the foreseeable future, the US isn’t going anywhere, it’s not an unstable pseudo-dictatorship/monarchy with 100% inflation. That makes those bonds a nice simple and safe investment vehicle for insurance companies and pension funds, who NEED safe simple investments (now that mortgages aren’t).
ETA At the end, Greece’s debt was 113% of GDP. And like with the currency, as shit hits the fan, GDP falls so that percentage goes up even though the debt stays the same. So the question we need to make is, “will the US GDP go up or down?”
ETA2 The US debt is currently between 90 and 94% of GDP. If GDP continues to fall, the percentage will eventually slide up over 100%. If GDP suddenly takes off again, the debt ratio goes down.
Sort of like asking how much personal debt is too much, ultimately depends on what kind, and how much they make.
The most basic question is “Will this debt get to a point where we can’t pay it off?” If you’re running a debt for a good project that generates big returns so you can pay it back within a reasonable time period, then it’s OK on the debt front (and the relevant debate is “is this project worthwhile.”) What’s more concerning is that there is no apparent mechanism by which the US’s ever-increasing deficits will not increase, given that nobody wants to cut entitlements and history suggests that we can’t actually squeeze out more tax revenue, certainly not by sticking to populist proposals to merely “raise taxes on the rich.”
So bad debt not a number, it’s about rates of change and future expectations.
It was balanced when the Dems were in. Clinton left a surplus. That was not bad.
The U.S. situation is unique, but not necessarily in a way that makes it easier to carry big debt.
For example, the U.S. dollar is the world standard reserve currency. As a result, the U.S. has always been able to charge more in interest on lending than it pays on borrowing, This difference has allowed the U.S. to carry a large current account deficit and makes the cost of the debt lower in real terms. If the size of the debt spooks the international community enough that they decide the U.S. dollar isn’t the safest financial vehicle around, then the U.S. could lose that advantage.
Japan has a debt that’s about 160% of GDP. But Japan’s debt is held almost entirely internally, as the Japanese have a high savings rate. The U.S. has a very low savings rate, and at high debt loads is increasingly dependent on other countries to buy up debt.
A pretty good academic paper last year found that countries that have debt loads greater than 90% of GDP have growth rates 1% per year lower than countries with low debt. That’s a huge cost in the long run as that 1% compounds for other countries relative to your own. But again, the cost of debt for other countries may not be the same as for the U.S. Maybe the effect isn’t as strong, or maybe it’s worse.
Of course, interest on the debt is a major factor. A high debt load puts pressure on the central bank to keep interest rates low. Most government debt is short-term and has to be rolled over every few years. The U.S. debt is around 13 trillion dollars right now. That means a single point of interest costs the U.S. government budget about 130 billion dollars. The treasury has taken advantage of low interest rates to take out debt in very short terms - almost 50% of the debt expires within 12 months and has to be rolled over. This is going to put tremendous pressure on the fed to keep interest rates low.
Consider what happened in the 1970’s - loose monetary policy caused ‘stagflation’ - high inflation and low growth happening at the same time. The solution was to raise interest rates to very high levels historically, shrinking the money supply to get inflation under control.
The fed is currently undergoing a very loose monetary policy. Bernanke just announced another round of quantitative easing (injecting more money) to try to target inflation at a slightly higher level than it is now. He knows that this money has to come back out once the economy starts to recover more strongly, or inflation will start to rise dramatically. But can the U.S. raise interest rates like it did thirty years ago? I doubt it. A 15% interest rate at 100% of GDP debt load means 15% of GDP would have to go to interest on the debt, were it all to rollover in the high interest period.
No one knows how much debt is ‘too much’. What we do know is that debt crises rise up very suddenly, and that many countries have had debt crises at debt loads similar to what the U.S. is carrying. Greece had a debt crisis at a lower debt load. Some countries manage to carry more debt. But it’s a risky game to play, and it’s very expensive, and it does eat away at economic growth and ultimately the wealth of the country.
Good point. Another way to look at borrowing to pay for entitlements is that the U.S. is borrowing from its own future productive capacity to pay for benefits for people today. That’s ultimately self-destructive.
This is very interesting. I’d be interested in seeing a cite for the 90-94% number and how that number has developed over the last twenty years. (FTR; I’m being sincere, but I’m Norwegian so I don’t really know where to find these kinds of numbers myself in your system.)
The numbers I’ve heard are in the neighborhood of 130% of GDP, but you would probably start running into funding problems before that point. The US, with the dollar being the main world reserve currency could probably go a bit higher than that.
As to the role of the Fed, it can pull money out of the economy very easily by simply selling securities it has on its books. Fed sells -> people buy -> less cash in the economy and more at the Fed. The Fed also has numerous other methods - raise interest it pays on excess reserves, manipulate bank reserve requirements, etc.
The Fed’s affect on interest rates is really more indirect than direct. Yes it sets the fed funds rate and other rates are based on that, but that is only effective to the point that it jibes with reality. And the reality is the availability of cash and credit. If cash is easy to come by, huge increases in the fed funds rate won’t stick as to other rates that may be based upon it.
This is the same reason that the fed has absolutely no control over long term rates, only short term. The market determines long term rates. Just google the term “bond vigilantes” to see what I mean.
President’s don’t make the budget, Congress does. It was a Republican Congress that made cuts and balanced the budget, which has nothing to do with the question because it is about debt.
It was the all-Democrat 1993 Deficit Reduction Act that balanced the budget and it was fiercely opposed by the GOP at the time. We were told that the tax increases would destroy the economy, luckily this turned out not to be the case. It was the very same Republican Congress under a Republican President in 2001 that then scrapped the PAYGO system and the 1993 all-Democrat Deficit Reduction Act guidelines and went on the biggest (unfunded) spending spree in history.
As far as the OP debt thing goes US federal debt (as opposed to gross debt) was 90% of GDP at the end of WW2. US federal debt is currently around 55%. (That’s a guess, it went over 50% sometime last year.) And we got rid of that debt through growing the economy. Although the US continued to run a small deficit throughout the 1950s because the economy grew so much, far quicker than recent decades. Massive debt didn’t affect economic growth back then. It’s certainly not going to help growth but history shows us what’s imperative, even if it means running up massive short term debt, is to get the economy going again as if you don’t debt cntinues to go up. So debt really isn’t the problem in the short term, the problem is getting the economy going again.
I agree with that. It’s the reason Clinton was able to leave office with a surplus. Economic activity generates tax revenues so more is better.
The fed has done everything possible to help the economy along and it looks like it might finally be having an effect. The calculated value of the money multiplier seems to have been increasing steadily since Feb/March of this year (jump to bottom of page).
This brings up a good point. How are we defining national debt? If you include personal debt, is it net or gross?
Also shouldn’t the interest be a factor? The yield on a 30yr U.S. Treasury bond is less than 4% right now. Greece, on the other hand is paying 13% on 2 year bonds. Even if they could get that 13% for 30 years (which they can’t) the U.S. could support 230% more debt for the same cost. So if Greece is going bankrupt at 113% of GDP, the U.S. would go bankrupt at 260% GDP.
I don’t think they’ve done everything possible, I think they could have been far more expansionary but they’ve been terrified of inflation and increasing interest rates even though we’re facing the opposite. Or at least enough Fed board members have to block any new expansionary policy after the initial post-Lehman weekend stuff.
That said I don’t think the Fed can really do much. It looks like they’re going to start QE again but this is basically supply side monetary policy. Lower long term interest rates and more liquidity in the system give business more opportunity to invest but there’s no increased demand for those businesses to cater for so they won’t invest. Banks aren’t going to lend more to consumers and consumers aren’t going to borrow more because they’re all a lot poorer than pre-meltdown and a lot of them (boomers) are now frantically saving for retirement over the next decade or so. So all that money is going to end up getting borrowed and invested by the only people with money, the top 1% (or less), and probably mostly just inflate stock prices, the stock market being the only thing currently showing much life in the economy.
This is a bit of an oversimplification. QE will have some effect, will create some economic growth. Banks will lend a little more and consumers will borrow a little more. Not all of the QE money is going into equities. But it’s a supply side move. Until we do something about actual demand we’re not going to get anywhere fast. Moderate Republican governments like the current one and future Democratic ones or more extreme Republican governments like future Republican ones are going to do everything but address demand, try every possible other thing/sit on their hands and do nothing until things get so bad that they really have no other option. Because fixing demand will mean a redistribution of wealth.
If we were owing 260% of GDP yields on ten year bonds would probably be 1% or less.
The effectiveness of QE depends on the multiplier which is now less than one (normally in the 2-3 range). That said, it has been increasing. Most of the money that goes out the door as QE ends up sitting in excess bank reserves. It doesn’t do any good until it makes it’s way into the economy and the only way that happens is via lending - which isn’t happening right now. Big companies have record amounts of cash already and consumer credit is still shaky.
There are some on the Fed’s open market ops committee (FOMC - the guys that execute the fed’s policies) who are concerned with inflation. I can’t say I know their reasoning but part of the problem is that fact that once banks do start to lend, they have over a trillion dollars in excess reserves to hand out. THAT would in fact create some serious inflation. So getting the timing right on this will be tricky. You want to shrink the money supply but if you do it too quickly you stifle economic growth and if you are too late you get inflation.
Not to beat on this horse even more but can someone come up with a cite about U.S debt? I was under the impression that the U.S generates 15 trillion dollars a year. How much is the debt in relation to GDP?
I’m surprised no one has commented on this. I don’t think this is very convincing. You say we can’t squeeze out more tax revenue, and your cite explains this by saying,
So, basically, it hasn’t happened since the Korean war, so it’s a “structural-political limit.” But I don’t think a “structural-political limit” is a thing - it’s either a structural limit, or a political limit, or neither (perhaps we simply haven’t raised tax revenue above that level because there hasn’t been a compelling reason.) And if it’s not a structural limit, we can probably raise revenue: political limits are a function of context, and if the context changes (a debt crisis, or even just prolonged structural deficits, or even just different leadership), it’s possible that the political limits could change as well.
So to really say we can’t raise tax revenue, I think you need to show more that there’s a real structural limit in our economy around 20%. This is not demonstrated. Furthermore, if we look at the economies most like ours, it looks like this is not a structural limit. While US governments raise 28% of US GDP as tax revenue (when you add in states and localities), the UK raises 39%. Germany raises 40%. France, 46%. (cite: http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP.) So looking at similar countries suggests that we can, in fact, raise tax revenue still.
I don’t know if this site is accurate, but it has a lot of very interesting stats about every aspect of the national debt - http://www.usdebtclock.org/
edit - national debt is apparently 13.6 trillion.
US business is currently sitting on a two trillion dollar fund that they aren’t investing. They don’t even have to borrow a dollar from the banks and they already have two trillion dollars, an amount they’ve accrued since 1981, to invest. So who are banks going to lend to?
The borrom line is that in a world of massive existing business overcapacity banks are only going to get the opportunity to lend to businesses facing increased demand (again an oversimplicity.) So where is this increase in demand going to come from absent a redistribution of wealth?