MacroScope

America is not Greece: Low funding costs give U.S. government room to borrow

December 5, 2012

Is the U.S.on the road to Greece, as some politicians have proclaimed?

Most economists say the comparison is nonsense. At a towering $15 trillion, the U.S. economy is not only the world’s largest, it is also more than 50 times the size of Greece’s. This gap makes any type of comparison difficult – it would be like analyzing trends in Maryland in relation to the entire euro zone.

Another key difference: Unlike Greece, the U.S. actually controls its own currency. That means a debt default is effectively impossible. This reality, coupled with strong monetary stimulus from the Federal Reserve, helps explain why U.S. bond yields remain near historic lows despite larger deficits.

Mark Weisbrot, co-director of the progressive Center for Economic and Policy Research in Washington, says a country’s interest burden is far more important than its total debt levels in determining the government’s ability to service it. He argued in a recent editorial:

Contrary to popular nonsense about America ‘ending up like Greece,’ the U.S. doesn’t even have a public debt problem. Net interest on the federal debt is currently less than 1 percent of our national income, the lowest it has been in more than 60 years. And it’s the interest burden that matters, not the big numbers like $16 trillion that are thrown around in scare stories.

Why is that? Weisbrot explained further in response to an email:

Imagine you had a credit card debt of $40,000 but the interest rate was just 0.1 percent – you wouldn’t have much of a problem. It’s the same thing for a government – 1 percent of GDP is not a lot of money to come up with. Greece hit 6.8 percent last year, that’s why they are in trouble. (Also, because they have a “foreign” currency that they can’t create). In fact, none of the other countries would even have run into problems if their interest rates hadn’t shot up.

Note that I used net interest payments for the U.S. – that’s because the government also receives interest. The gross interest is still pretty small though, about 1.4 percent of GDP. But it’s net interest that matters: that’s why Japan has no problem even though its gross debt is about 220 percent of GDP. About half is owed to the central bank. What this means is the interest on that debt goes back to the Treasury. Our Treasury now receives about $80 billion annually from debt held by the Fed.

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