What percentage of GDP should debt be managed at?
People calculate a variety of numbers based either on theory or empirical data. I suspect the answer depends on many factors and dont find any of the published calculations very convincing. However, I have a conservative bent on the issue. I think both individuals and governments have the same constraint. If you borrow more money than you could repay out of income, then you are at the mercy of your lenders. If they refuse to refinance maturing debt, youre in trouble. I dont think either individuals or governments should ever be at the mercy of lenders. For an individual, that doesnt necessarily mean keeping debt below some multiple of annual income. If you have a 30-year, fixed-rate mortgage on a home, and you are willing to live in the home for 30 years, and can cover the payments out of income, you are not at anyones mercynot the lender, not the real estate market. But you have a 5/1 ARM mortgage, or youre not willing to live in the house long-term, or dont have income to make the payments, youre in trouble. For a sovereign government, lenders have less power than they do over individuals. They are unlikely to be able to seize assets or garnish income. But there can be enormous economic damage from a default. So if lenders refuse to buy the debt you issue to pay off old debt, or charge more interest than youre willing to pay, you have to choose among unpleasant alternatives. You could trash your currency and anger lenders by paying off the debt in newly created money. You could refuse to pay off the old debt. At the current US debt-to-GDP ratio of 128%, if interest rates went up to 6%a level that was considered normal until 2008interest payments would consume half of federal tax revenue. Long before that, paying interest would become politically impossible. At current debt levels if the federal government doubled taxes and cut spending to zero, it would still take five years to pay off the debt. Theres no remotely acceptable fiscal strategy to pay off the debt in less than about 50 years. Although the federal government has plenty of assets, selling them does not help. They can pay off debt today, but at the cost of reducing future revenue or increasing future expenses. On top of that, the federal government has massive obligationsmainly in the form of unfunded long-term healthcare promisesthat far exceed the official debt. What that means to me is things can continue along fine for decades, maybe forever. But if something does happen to upset things, the US has borrowed money it cannot realistically repay, and will face a lot of pain as a result (lendersand people counting on government promises, and taxpayers will absorb a lot of pain as well). Debt would have to fall to roughly 50% of current levels before I could see the US deal with an unwilling-lender situation without a crisis.