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by eigenspace 673 days ago
> Lastly, debt only matters in comparison to rates. If you're borrowing lower than growth of GDP, then that borrowing is generally considered a net positive. Artificially deflating rates in the late 2010s and the rapid increase in rates post-COVID is not going to do well for government debt because we can't shift our budgets quickly enough to adjust. Of course that also assumes a functioning congress, which we certainly don't have.

The USA's debt-to-GDP ratio has been increasing for a very long time. Every once in a while, GDP growth starts to overtake debt growth for a few years and then the debt load ratchets up further. So if the plan is to outgrow the debt, that doesn't appear to really be working so far.
1 comments
polygotdomain 673 days ago
The thing that debt to GDP misses is the rates which need to be paid on that debt. For a while those rates were so low, it meant there was little reason to focus on paying down the debt, which is only going to keep that ratio relatively stagnant.

What is far more telling is the debt servicing to GDP ratio, which is far more useful in telling us how much our debt is costing us. This winds up looking wildly different than debt to GDP and has been a lot less concerning up until we've seen the latest spike in rates.

Debt to GDP - https://fred.stlouisfed.org/series/GFDEGDQ188S

Interest to GDP - https://fred.stlouisfed.org/series/FYOIGDA188S

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eigenspace 673 days ago
Yeah, that's a great point. But I will say that I think interest-to-GDP ratio is also a bit misleading here because what it doesn't capture is the uncertainty about future interest rates.

Because of the massive amounts of debt held by the USA, there is no option to just pay off the current debt. If there was a sharp increase in interest rates (or even just a long-protracted period of interest rates like the current one), the USA would have no option but to take out further debt at painfully high rates just to stay ahead of existing debts.

So even if interest payments aren't so bad currently, the large debt load is a large vulnerability.

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