Most economists measure debt as a percent of GDP. However, this is really irrelevant, since what matters is a countries ability to pay back the debt, which is dependent on tax revenues. But maybe the level of debt itself is irrelevant and the only thing that matters is the interest cost. At low levels of interest, a country (Japan) could easily carry an enormous level of debt.
However, once interest exceeds a certain percent of revenue, I think the system could reach a tipping point. Maybe taxes could be increased dramatically, but I think a populace would rebel at higher taxes just to pay interest. And maybe other expenses could be cut, but politicians love to spend and entitlement cuts to pay interest also wouldn't be too popular. And maybe more QE could be done, but this risks inflation getting out of control.
I think having net interest costs above 20% of revenues is a tipping point. Maybe the level is slightly higher or lower, but this guess is as good as any. Once interest exceeds this amount, then obviously more debt is being incurred to pay it, the rate demanded would increase and the interest keeps increasing and soon will skyrocket out of control. And either default or hyperinflation would be inevitable.
So, when will the US reach this point? I will use the very conservate CBO numbers that assume that the deficit will be reduced to only 205 billion in 2015. And I will also use the net interest numbers. Using a 5% annual increase in revenue, and a 10% average increase in interest costs after 2021, the 20% level would be reached in 2030, when revenue would be 7709 and interest 1563.
Maybe I am using numbers that are too pessimistic, but isn't it true that at some point interest will be a problem when deficits always increase? So this number is as good as any. And I don't think the numbers are too pessimistic. Taking a more cynical viewpoint (see the prior post), the 20% limit could be reached as early as 2019.
Update 6/19/2012: I am going to call this model F-1. Interesting theory.
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