How Much Debt Is Bearable?
The announcement comes months after the Congressional Budget Office released a report
projecting a $2.3 trillion deficit in 2021. Biden’s plan will almost certainly make the deficit worse. Though the plan contains various tax increases to fund its programs, the taxes are likely to fall well short of government outlays, economists say.
“The laws of economics are more rigid than the laws of the federal government, and these tax hikes are unlikely to yield the windfall Biden expects,” Joshua Jahani, the managing director of Jahani and Associates,
noted in a recent
NBC News article.
As a result, the
$28.2 trillion national debt will swell even faster. Worse, when unfunded liabilities are included in the balance sheet, as private companies are legally required to do, the debt
exceeds $120 trillion.
How much risk these obligations present is unclear.
There is a school of thought that suggests these debts pose no serious risk. After all, in theory, a government can roll over its debt indefinitely. However, in
a recent article for the Federal Reserve Bank of St. Louis, economist David Andolfatto noted that ultimately the government doesn’t decide how much debt is bearable. The market does. “There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or
inflation rate) and a given structure of interest rates,” Andolfatto wrote. “However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there.”
A Dangerous Level of Debt?
Andolfatto is right that no one really knows the debt tipping point. But it’s worth noting that the US
debt-to-GDP ratio—essentially a country's debt compared to its annual economic output—was 129 percent at the end of 2020. In other words, the official US debt was nearly a third larger than the entire US economy.
That is
considerably higher than Greece’s debt-to-GDP ratio in 2010, when it
received a bailout from the International Monetary Fund to avoid defaulting on its obligations.
The United States is not Greece, of course. Its economic potential is far greater, and it is operating under a currency it controls. But there’s no denying that the US is in uncharted territory. Today, the federal government debt-to-GDP ratio
is higher than it was at the conclusion of World War II, when the nation assembled
one of the largest armies the world has ever seen. Perhaps even worse, the government is piling on debt faster than ever.
Eventually, as Andolfatto notes, the market may very well decide enough is enough, and the demand for Treasury securities will dry up. Indeed, this is likely one reason cryptocurrencies are suddenly flourishing.
In seemingly the blink of an eye, cryptos have gone from being discussed in the corners of Reddit rooms and university lounges to a market of
more than $2 trillion. It’s no exaggeration to say cryptos are now mainstream; they are being gobbled up by hedge funds and
star athletes signing 10-figure contracts.
And it’s not hard to see why. The market is hedging. Like rats on a sinking ship, many are eyeing an exit, sensing that the dollar’s day may finally be coming to an end as its value is eroded by mass pumping.
