[jeffdavis]

"Things won't get interesting until B approaches D."

I'd say things would get pretty interesting well before that point. B=D is just the point at which a default is inevitable (unless much higher tax revenue is achievable without causing other problems).

But the problem is that the interest rates are so low now that large increases are not outlandish. 7 years ago, the rate was more than double what it is now. Looking at the graph in the article, in the 80's it was over 10%, more than 4X the current rate (which would imply 1.6 trillion in debt service).

It seems like we're making a big bet that interest rates are down permanently. That may be true, but it seems like a fragile assumption to me.

[nhaehnle]

There is no reason for the government to default when B=D. (If you disagree, please take a deep breath and think through the mechanics of exactly how the US federal government could be forced into default.)

In reality, B=D is likely to balance itself out again. This becomes apparent once you think through where the interest payments go.

If they are reinvested in government bonds, nothing happens. If they are reinvested in other financial assets, the general interest rate decreases, which will also pull down the interest rate on government bonds (reducing B). And if the interest payments end up with people who spend them on goods, well, that grows the economy, which increases D.

[pingburg]

I agree that it will happen before B equals D but no one knows the tipping point ratio. In theory, a government can always argue right up to that point that, "we'll grow our way out of this."

[muzz]

Interest payments as a percentage of GDP are actually much lower now than they've been in the past:

http://research.stlouisfed.org/fred2/series/FYOIGDA188S

[jeffdavis]

That doesn't dispute my point at all. I'm not worried about the payments now. I'm worried about the payments if interest rates go up.

And we shouldn't be surprised if rates go up substantially, because they are at historic lows right now.

[muzz]

There is a reason why they are at historic lows-- it is the decision of market participants. Your concern is essentially that market participants will somehow do a complete 180, for no stated reason.

[jeffdavis]

"Your concern is essentially that market participants will somehow do a complete 180, for no stated reason."

If market participants demand a higher interest rate, I wouldn't call that a "complete 180".

Regardless, change is the only constant, as they say. Markets move. Behavior changes in response to the environment. If we really are supposed to be a risk-free place to loan money, then I would think we'd be a little more resilient to rising interest rates, which happen fairly often historically.

[skylan_q]

If you count the federal reserve as a market participant.

[JetSpiegel]

Interest doesn't get come out of the GDP, only the Government pays it.

[dllthomas]

The government pays it, ultimately, out of tax revenues derived from GDP.