US government debt-to-GDP ratio worse than Greece’s before 2008 crisis

US President Joe Biden speaks at a joint session of the US Congress on the eve of the completion of 100 days of government, April 28 | Photo: CHIP SOMODEVILLA / GETTY IMAGES NORTH AMERICA / Getty Images via AFP

United States President Joe Biden presented a new plan to Americans at a joint session of Congress last week: no more spending.

The recently launched $ 1.8 trillion plan, introduced just weeks after Biden signed the $ 1.9 trillion Covid-19 pandemic relief spending bill, includes a community college “free”, as well as a universal nursery school for children aged three and four.

“President Biden must usher in a new era that dramatically expands the size and role of the federal government,” The New York Times reported.

How much debt is bearable?

The announcement came months after the Congressional Budget Office released a report that projects a deficit of $ 2.3 trillion in 2021.

Biden’s plan will almost certainly worsen the deficit. Although the plan contains several tax increases to fund its programs, taxes will likely be well below government spending, economists say.

“The laws of the economy are stricter than the laws of the federal government, and these tax increases are not expected to produce the benefits Biden expected,” Joshua Jahani, CEO of Jahani and Associates, said in a recent article. from NBC News.

As a result, the national debt of $ 28.2 trillion will grow even faster. Worse yet, when unfunded liabilities are included on the balance sheet, as private companies are legally required to do, the debt exceeds $ 120 trillion.

It is not yet clear what the risk represented by these bonds is.

There is a school of thought that suggests these debts pose no serious risk. After all, in theory, a government can roll over its debt indefinitely. However, in a recent article from the Federal Reserve Bank of St. Louis, economist David Andolfatto noted that ultimately, it is not the government that decides how much debt is sustainable. But yes, the market.

“It is assumed that there is a limit to what the market is willing or able to absorb in the form of treasury bills, for a given price level (or rate of inflation) and for a rate structure of interest given, ”he wrote. Andolfatto. “However, no one really knows how far the debt-to-GDP ratio can go. We won’t be able to know until we get there.”

A dangerous level of debt?

Andolfatto is right that no one knows for sure the inflection point of debt. But it’s important to note that the US debt-to-GDP ratio – essentially a country’s debt to its annual economic output – was 129% at the end of 2020. In other words, debt US official was almost a third higher. than the entire US economy.

That’s considerably higher than Greece’s debt-to-GDP ratio in 2010, when the country received a bailout from the International Monetary Fund to avoid defaulting on its obligations.

The United States is not Greece, of course. The North American country has much greater economic potential and operates under a currency it controls. But there is no denying that the United States is in uncharted territory. Today, the US federal government’s debt-to-GDP ratio is higher than it was at the end of World War II, when the country assembled one of the greatest armies the world has ever known. . What is perhaps even worse, the government is accumulating debt faster than ever.

Ultimately, as Andolfatto notes, the market may well decide enough is enough and the demand for Treasuries will dry up. In fact, this is probably one of the reasons cryptocurrencies are suddenly thriving.

In the blink of an eye, cryptocurrencies stopped being discussed in the corners of Reddit forums and in college rooms to become a market of over $ 2 trillion. It is no exaggeration to say that cryptocurrencies are now popular; they are eaten up by hedge funds and famous athletes who sign billionaire contracts.

And it’s not hard to see why. The market is hedging. Like rats on a sinking ship, many envision an exit, believing that the dollar’s glory days may finally come to an end as its value is eroded by mass injection.

Ignore the story?

In a popular 2016 article, author Richard Ebeling explored how the central planners of ancient Rome destroyed the economy.

Much of what Ebeling describes – debt, massive spending, inflation, and destruction through price controls – sounds oddly familiar to modern ears. And Ebeling naturally explores the ancient puzzle: why did Rome fall?

For centuries, as any history buff knows, thinkers from Edward Gibbon to Peter Heather have asked this question. The answers vary. Some blame the barbarians, others blame immigration. Some claimed it was Christianity to blame, while others pointed to illnesses or a weakening of the Roman legions.

All of these theories are interesting and worth analyzing, but I have found no better explanation than that offered by economist Ludwig von Mises, who concluded that Rome’s decline was the result of its rejection of individualism and free market.

“The wonderful ancient civilization perished because it did not adjust its moral code and legal system to the demands of the market economy,” Mises wrote.

He continued:

“A social order is doomed if the actions required for its normal functioning are rejected by moral standards, are declared illegal by the laws of the land, and are prosecuted as criminal by the courts and the police.

The Roman Empire disintegrated because it lacked the spirit of liberalism [clássico] and free enterprise. The policy of interventionism and its political corollary, the principle of the Führer, caused the decomposition of the powerful empire, because they will necessarily always disintegrate and destroy any social entity. “

US President and statesman John Adams once said that there are two ways to destroy nations.

“One is for the sword and the other is for the debt,” Adams said. (Although the quote is largely attributed to Adams, it is not confirmed by written documentation.)

There is no doubt that debt is a serious problem. (Ask the ancient Romans and modern Greeks.) But if Mises is right, the explosion of debt may just be a symptom of a much bigger problem: the collapse of the spirit of freedom and the growth of a system hostile to free enterprise.

We need to learn from one thing the Romans did not have: their fateful example.

© 2021 FEE – Foundation for Economic Education. Posted with permission. Original in English

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