Thanks for posting.
What a ding-a-ling. Interest rates are historically very low right now and only because the Fed is buying our debt. Once that stops, interest rates will go up.
Let’s assume that the establishment Republicans win and privately held debt goes up to 100% of GDP. Let’s also assume that we decide not to inflate our way out of it (not a big assumption because much of our debt is short term, must be rolled over and can’t be inflated away). In constant dollars....
At 2.5%, interest payments are $357Billion every year.
At 5.0%, interest payments are $715Billion every year.
At 10%, interest payments are $1,430Billion every year.
As the debt grows and interest rates climb, the cost of just paying the interest becomes so high that all growth ends as taxes to pay just for the debt can climb higher than $715B and near and may pass $1,430B per year.
When interest payments don’t compete for investor dollars the cost of unpaid debt increases geometrically. When interest payments DO compete for investor dollars the cost of unpaid debt becomes infinite (the limit as available dollars goes to zero). That is why countries MUST fail when the Debt to GDP ratio becomes greater than 120%.
A 124 page paper available for download, This Time is Different: http://www.nber.org/~wbuiter/cr1.pdf
What do you think of Roubini's observation that U.S. external debt, at roughly $4 trillion, is less than 25% of GDP? The same goes for the Japanese and the Italians. They owe a lot to themselves, but not to others.
It's sort of like owing your dad money. I can see how this can cause other problems such as malinvestment and disintermediation, but I'm wrestling with how we can 'drown'.
This does not avoid the future problem of Boomer care and pensions, the source of the $114 trillion problem.
Let’s also assume that we decide not to inflate our way out of it
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What if they decide to QE3 their way out of it. Just printing the 130 billion for August for example. Surely that wouldn’t be to much.
Of course the Communist Chinese wouldn’t be happy.
(Tariffs anyone?)
I’d like to see this Debt Ceiling Frozen at 14T. Let the Goverment print the money to cover the difference every month. Heck they will continue to print as much money as they want, whenever the want, whether we increase the ceiling or not....so I say Freeze the Ceiling and thus save US from another 2 or 3 Trillion dollar increase in our debt.