This is as good a place as any to get a handle on the national debt, the issues associated and the conflicts over what to do about it and whether it is a pressing economic problem, or simply a political issue.
We will unpack the nature of the debt - what it is exactly - soon enough, but to get a look ahead click here and here.
We will also later discuss how the debt is incurred. Put simply, the US gets into debt when it needs to sell treasury bonds to pay for items that it is obligated to pay for by law, but that we do not have the tax revenue to pay for. These bonds are offered in the open market at rates determined somewhat by the market (we'll wade into details soon enough). If the market consideres these bonds to be safe, the interest rate is low. If the market considers the bonds to be risky, the interest rate is high because that will guarantee the bonds holders will make money on the bonds even if they might be defaulted.
The question is this: When does the nature of the debt start to convince bond hoders that treasury bonds are risky? What is that level? Can we determine this ahead of time and adopt strategies to deal with it?
The article pooints out that a central dispute right now concerns goals. Should the gal right now be to pay down the debt, or to stabilize it? Democrats prefer the latter, Republicans the former. Much of the controversy right now over budget plans comes down to that dispute. Republicans are more likely to say we are at crisis levels, Democrats are not.
So while there is a shared assumption that excessive debt is not good for the nation and can suffocate the private sector, there seems to be no consensus among economists on what level of debt does so.
Right now the debt is 76% of GDP - which is double the historic rate of 39% of GDP. What debt to GDP ratio pushes the US over the edge? What is the tipping point? Soon after WWII, the debt to GDP ration was around 120%, but was quickly paid down.
The author toys with the problems posed - possibly - when the ratio hits 80% or 90%. We don't really know what the result is because if we cut spending right now when the economy is still struggling. Debt can be caused by a slow economy since it will not create the revenues that allow for the debt to be paid down. this is the argument against austerity. Paying down the debt prematurely can hamstring the economy which leads to greater debt.
The author states that it matter who holds the debt. Some of our debt is held domestically, by Americans. But some is held by foreigners, which creates risks. In Japan, most of their debt is held domestically so their 220% debt to GDP is tolerated. That might not be the case with US debt.
The author concludes by stating that bondholders need to have some level of trust in the ability of elected leaders to handle crises effectively. Stable debt to GDP ratios means nothing if levels of trust are low.
