Can America’s debt get too big to pay?

By Felix Salmon
May 21, 2009

Reader Matthew Kelley writes with a question:

Our national debt is over $11 trillion, it is not unreasonable to think that in my lifetime I will see a quadrillion dollar national debt. Do you think that there is a level of debt at which the United States would pull a ‘latin america’ and just default on the debt?

First, it’s a bit of a stretch to think that in your lifetime the national debt will hit $1 quadrillion. Let’s say you have 50 years to live, and let’s say that, pessimistically, inflation averages 5% a year over that time. US GDP is now about $14 trillion, and if real GDP growth averages 3%, then we’ll have nominal GDP growth of 8% a year for 50 years, which would take us to about $650 billion trillion. So a quadrillion-dollar national debt in 50 years’ time would require a debt-to-GDP ratio of about 150%. It’s all possible, but if you just tweak the numbers a little — say you have 45 years to live and inflation averages 2.5% and real GDP growth is 2.5% — then GDP is just $125 billion trillion when you die, and there’s no way you could have a quadrillion-dollar national debt.

But more to the point, for all the rhetoric from campaigners about countries struggling under their debt burdens, there really isn’t much of a correlation between the level of a country’s debt and the probability that it’s going to default — especially not when that debt is wholly denominated in domestic currency. Countries with low debt-to-GDP ratios can default — just look at Ecuador right now — while countries with very high debt-to-GDP ratios can stay current on that debt indefinitely — Japan is the most obvious example, but there are many more.

If you want to come up with a scenario where a developed country defaults on its debt, you’re most likely to look at a case like Italy, where the debt is denominated in euros and there’s a non-zero chance that the country is forced out of the eurozone; in general, if you want a sovereign default, the best way to get one is to find a country with hard-currency borrowings which then has a massive devaluation. That can’t happen in the US — there’s no currency mismatch between its tax revenues and its liabilities.

Even a doom-monger like John Hussman says that Treasury bonds are “default-free securities” and that the worst-case scenario is not 5-6% inflation for a year or two, but 5-6% inflation for ten years. (Which he calls “a near-doubling of the U.S. price level over the next decade”.) Neither of these things are likely to increase the chances of default — in fact, quite the contrary. Since the US has only a tiny number of inflation-linked bonds, a strong dose of inflation would therefore substantially decrease the real value of the US national debt.

Essentially, the only way to get to a quadrillion-dollar national debt is via inflation — but inflation manages to reduce debt levels all by itself, meaning there’s no need to default any more. So a US default is almost certainly not going to happen.

Update, and irony alert: Obvs wrote “billion” where I meant “trillion”. About 90 minutes after posting this.


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