US Will Hit 94% Debt to GDP Ratio Next Year, Surpassing the Level Where Debt Starts Reducing Economic Growth


Ambrose-Evans Pritchard notes:

Fitch expects the combined state and federal debt to reach 94pc of GDP next year, up from 57pc at the end of 2007. Federal interest costs will reach 13pc of revenues, meaning that an eighth of all taxes will go to service debt.

The figure of 94% is dramatic given that two top American economists – Carmen Reinhart and Kenneth Rogoff – wrote last month :

The relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies…

Indeed, as Forbes noted in December:

Add the unfunded portion of entitlement programs and we’re at 840% of GDP.

Deficits do matter.

Note 1: Reinhart and Rogoff also make it clear that the larger the ratio of external to internal debt, the greater the drag on economic growth. The U.S. had a high level of external debt, although the Fed is now covertly monetizing much of the U.S. debt. So I’m not sure what the ratio of external versus internal debt really is at the moment.

Note 2: Fitch’s 94% figure includes state as well as Federal debt. I am not sure if this changes the above analysis.

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  • I think it is a red herring to point to 94% public-debt-to-GDP as some sort of magical number. The Reinhart and Rogoff study found a statistical correlation between government debt ratios higher than roughly 90% and slower growth, but as we all know, correlation is not causation. I haven’t looked at the study in enough depth to make any categorical statements, but couldn’t it be that high government debt ratios are often a by-product of private debt deflations, such that the statistical correlation between high government debt ratios and slow growth that Reinhart and Rogoff identified is fundamentally attributable to prior excessive *private debt*?

    Just saying…