"debt ratios of around 200 percent of gross domestic product are at the extreme limit of what advanced economies can experience without becoming destabilized."

Interesting statement. I would put the limit much lower for all but two (important) countries. Japan, who are managing somehow to maintain cohesiveness in the face of this sort of debt ratio, largely due to their insular and self-disciplined, willing to save locally at miniscule returns for national pride population, and the US, where quite frankly no one in the world with any sense really wants to find out what happens if they're pushed over the edge. I suppose the authors do say "extreme limit" but there aren't many countries that could get to that level without a backlash well before.

For pretty much anyone else %100 - %150 is enough to turn investors off and/or lead to internal instability. Greece is approx %100, Spain's debt is only %60 of GDP, and they're both having trouble rolling their debt over or balancing their annual budgets. Maybe they're not "advanced economies" but you certainly wouldn't call them third world.

Most OECD countries have much lower debt to GDP ratios. Without looking it up, they're mostly at around %30-%40 of GDP now? (I may be wrong). Which really is sustainable pretty much forever with modest reforms. It's the same sort of debt load a corporation might have for instance, in fact less would be regarded by the market as having a "lazy balance sheet".

Ltw, I concur with you that a 200% limit is wildly optimistic, and most sources that I've seen say that 100% is the edge of the cliff. It's true that Japan survives with that debt load, but not comfortably; the economy there really hasn't been good in a long time.

I saw a poll earlier this week that concluded that a 2/3 majority of the American public supports a Constitutional amendment requiring that the federal government maintain a balanced budget. In principle, I oppose this because it leaves no flexibility for contingencies; we could not have fought WWII if the federal government had been prohibited from borrowing back then.

However, I also recognize the fundamental truth of what Reynolds keeps saying about our current political class being the worst one in history. Our current government simply cannot be trusted to manage borrowing responsibly. Further, it's the very near-unlimited-power nature of our current government that has created this political class; large concentrations of power and money will always be overwhelmed with sociopaths and cluster B's. It will be necessary to sharply limit the scope of government in order to get those people out. Once government is limited, those people will lose their attraction to it, and go find something else to do.

Cousin Dave, I agree with you on the Constitutional amendment. That's one road to disaster. It's a shame no one listened to the people who were saying all this 30 years ago. P.J. O'Rourke among them, who explained the fallacy of the SS 'lockbox' in the 80's for fuck's sake when it was already obvious it was a joke, and also described the cost of the Savings & Loan bailout as costing "more money than you can shake a stick at, plus the stick". Oh for the days when you could describe these things in $500 million or a billion. (See 'Parliament of Whores').

It can be fixed - it's just going to hurt. The US has two things going for it that give some hope.

First, as unlikely as it may seem, demographically you're better off than most of Europe. At replacement level, a lot better than Italy's 1.3 babies per couple. So at least you have some chance of funding some of the future obligations, enough to stave off societal breakdown anyway. It allows a much higher debt service than any European country can promise.

Secondly, while you're right that the current political class across most of the West can't be trusted to manage debt (in Australia we're hammering our current govt over less than %7 net debt to GDP, and whether they can get the budget back into surplus within 2 years is a big deal - you wish yeah?), really, no one wants to see the US default. Least of all the countries holding that debt. Which will probably allow a peak around %200 as long as things are going in the right direction. It's an unprecedented situation.

Never have so few owed so much to so many :) Don't ask me how it's going to play out.

You have the mass media saying that the $38 Million in non-spending is a cut. You have the media saying that Congressional District 26 was a referendum on the Medicare reform and the Tea Party.

You have Barney Frank claiming that getting a lover a job at Fannie Mae while on the oversight committee was not a conflict of interest.

You have the Treasury printing funny money.

We are so fucked.

Ltw, interesting thoughts. The international market might let the U.S. extend its debt to 200% of GDP, but frankly, I don't want to find out. And I think that if the debt level did get that high, it would by definition be a death spiral regardless of what the international market thought -- it would crush the domestic economy to the point that slowing the growth, much less achieving a balanced budget, would be nearly impossible.

I could support a Constitutional amendment that made borrowing harder but not impossible. Say, that each Treasury issuance of bonds has to be approved by Congress, and such approval requires a 2/3 majority in both houses, and it must be a stand-alone bill. (Which actually gets me to one of my pet raves: why the U.S. Constitution doesn't have a provision prohibiting omnibus bills, like a lot of state constitutions have. Oh well...)

... no one wants to see the US default. Least of all the countries holding that debt.

There are fewer and fewer countries willing to hold our debt. The Chinese are getting rid of two-thirds of what they hold. The Federal Reserve is pretty much the only entity willing to keep loaning us money at this point. Essentially, they print the money and loan it to the government, and this has has tripled the money supply over the last three years.

"The Federal Reserve is pretty much the only entity willing to keep loaning us money at this point. Essentially, they print the money and loan it to the government, and this has has tripled the money supply over the last three years."

Yep, it isn't a "loan" in the conventional sense, because everyone knows these "loans" will never be paid back. It's the government printing money at whim. The ironic thing is that this is the very situation that the Federal Reserve is supposed to prevent. For going along with this scheme, the Tea Parties and the rest of the public ought to be demanding Ben Bernanke's immediate resignation, but few people understand the system well enough to know that they ought to be demanding this. (And it doesn't help that the mainstream media is doing its best to keep the situation a secret from the general public.)

Here's one other tidbit. I got curious about how much the U.S. government's bullion reserves are worth. Numbers are hard to find; apparently the contents of Ft. Knox have not been audited since the 1950s, but the most commonly quoted numbers indicate that the government holds about 150 million ounces of gold. (I'm assuming that there aren't significant amounts being held at some other, secret location; we have no way of knowing for sure, but I'm guessing not.)

Gold is currently selling for about $1500 per ounce. If we make a best-case assumption and say that the government could sell the contents of Ft. Knox at that price (which it realistically couldn't, since the release of such a large amount of gold would drive the price down), then the U.S. government's reserves are worth $225 billion. Which would not cover this year's deficit.

I don't disagree, Cousin Dave, but I have no hope whatsoever that the public would demand an end to this situation, even if they did understand what was going on.

Because why do we add somewhere between $1.5 to $2 trillion to our debt each year? Mostly, it is because 59% of Americans are getting a government check of one type or another. Of all the federal taxes collected by the government last year, every last cent of it - plus another $100 billion - turned around and went right back out the door in direct payments to Americans. So we were already borrowing at that point, even before spending anything on defense, discretionary spending, or interest on the debt.

80% of Americans are opposed to cutting spending on entitlements. So the printing presses will keep running and the checks will keep going out the door, even if those checks (and the money earned by people who aren't getting government checks) will simply have less purchasing power.

It is already happening. CPI reports inflation figures of around 2%, but they don't include food or energy prices in that measure, and they add in the effect of diminishing real estate values.

We can blame the politicians for not doing the right thing, fair enough. Be we also have to admit that if they DID do the right thing they would be voted out of office. Turns out the citizenry doesn't want to do the right thing either.

Interesting, Cousin Dave. By my math, then, if the U.S. national debt was to be backed by gold, that gold would have to be valued at around $30,000 an ounce.

Half of the people in America don't pay any income taxes. Average household income is around $45,000 a year, and if that household has two kids and pays mortgage interest, the deductions wipe out their income tax liability completely. We could eliminate the tax advantages of mortgage interest and the per-child credit, but then people would scream that we were just hurting the poor. They'd rather raise taxes on the rich. But you could tax the rich at 100% for a year and still not cover the deficit for that one year - there simply aren't enough rich people. So we could confiscate the assets of the rich, like their homes and yachts and stuff. But once the government did that, who would they sell the yachts to? Who would buy a yacht if they knew the government would simply confiscate it? We can't tax our way out of this situation either.

Really, Amy....

Bad enough to have Gretchen M shilling for Peterson, she gets paid.

You, on the other hand, (who really seems smarter than to go for the okey-doke)--what's your excuse?

So...all is actually rosy with the economy?