Predicting a U.S. Debt Crisis, Repeatedly

Exconmix writes Predicting a U.S. Debt Crisis, Repeatedly "This is bad news for the United States because, as it happens, the national debt is 80 percent of annual economic output, the nation has a persistent current-account deficit, and it is planning to significantly increase the scale of borrowing, relative to output, in coming decades.

A host of other studies have reached similar conclusions. The estimated thresholds range from about 60 percent to 120 percent, but the bottom line is always the same: the federal debt cannot continue to grow relative to the size of the economy, or else investors will start demanding much higher interest rates and the United States will fall into crisis.

‘We should be scared,’ said Professor Mishkin, a former Federal Reserve governor. ‘Something needs to be done,’ he added, although he acknowledged there was no sign of crisis just yet.

This is undoubtedly true in an absolute sense. But there are reasons to doubt the basic premise that the history of other nations can tell us how close we are to the cliff.

The problem with every attempt to look for debt limit thresholds has a name, and that name is Japan, a country that is able to borrow at one of the lowest average interest rates of any developed country despite a debt burden that is the largest, relative to its economic output, of any developed country. Nor is this an ephemeral anomaly. It has been true for years.

Japan’s debts total about 230 percent of its annual output, and so far, investors don’t mind."