U.S. Debt Tops 100% of GDP

Third solution is "taxation through inflation" in which the official inflation is 4%, the unofficial one is 10%, interest rates kept low, and over a few decades the debt gets nominally trimmed down against a nominally rising GDP. Real GDP growth will even accelerate this. Owners of assets that are not real-inflation protected (such as the debt owners) see their asset value go down ; people who have no net equity see their salary go up, but only in nominal value ; people who hold real-inflation protected assets that also distribute dividends are the winners in this.

That framing makes it sound like high defense and welfare spending are laws of physics, impassable mountains you just have to navigate around. They aren't, they're very specific political choices that can be changed quickly and easily once the will is there. If you're going to pin your hope on a "political reformer" who can "sell" to the electorate, you'd do better to hope for one that can sell lower entitlements and defense spending.

> But there are two solutions: reduce spending and/or raise taxes.

there are other solutions, that are more convenient politically than austerity:

- productivity boost

- higher nominal growth through inflation

- financial repression

and in theory there is also the option of defaulting

No, it's still a problem. The reserve currency just raises the headroom by something like 20 points by making cost of borrowing lower than it would be otherwise. There is no free lunch, just subsidized lunch.

Italy and Greece have been running at over 100% for ~30 years. It's not great, but it's also not the end of the world. It's even less bad for the US, as long as lenders still trust that the US government will pay them back.

30% of GDP would be better, but 100% isn't going to collapse the US economy on it's own.

Agreed. And driving 95mph is not a problem as long as there aren't any tricky situations hidden a few miles down the road.

Borrowing costs have already gone up. The 10 year treasury yield is already double from where it was during the 2010s. There are other factors contributing but it’s worth mentioning as a partial factor

It is not just reserve status that keeps borrowing costs low. It helps, but it's not the whole story.

The US dollar was the reserve currency in 1979. That didn't keep borrowing costs down.

The practical framing would be as two follow-up questions: what do the lenders care about? And what happens empirically when debt spirals?

If lenders do nothing, then nothing really matters - keep borrowing and let your debt grow exponentially.

In practice though, lenders, in their wisdom or folly, get spooked when debt goes up. In the Greek debt crisis, it all started with debt in the region of 130% of GDP. Rolling the debt with more debt spiralled away as lenders wanted an ever higher interest.

So US would either need to start really inflating its debt and test the investors patience, print the cash and let inflation run away, or tax and cut spending.

In the first scenario it kind of doesn't matter where the limit is - people sometimes argue about magic levels. The issue is that eventually the debt grows exponentially, so once it's out of control, it will exceed any reasonable level pretty quickly.

Can the US convince the world that their debt is special? I'm not sure. My reading is that investors are already twitchy about US debt, for other reasons for now, but higher debt levels surely won't calm them down.

So really I think the US has no better choice than to keep its debt down.

> The MMT folks think this is business as usual

MMT folks generally advocate that inflation is the way to measure if the spending is "too much" and argue that spending should generally aim to improve productivity (i.e. increase gdp) to minimize this issue (e.g. spending to build infrastructure so people can get to work is productive vs spending so people stay home is inflationary).

There is this pervasive idea that MMT promotes limitless spending and I'm not sure where it comes from, what they actually preach feels like a reasonable way to evaluate government spending to me.

> The right says it’s fine as long as it goes to endless wars, and the left says it’s fine when we spend the money on social programs. Both say it’s bad when the other side spends it, but not when their own spends it.

Spending is only one part. The part that almost nobody wants to touch is raising taxes to support the spending.

Having an economic science without politics at all isn't really possible - you have to define a goal for economic development to evaluate different approaches. And defining that goal introduces politics into economics. "Development for what or whom or whether at all" simply can't answered in a neutral way, it will always be in the interests of some and against the interests of others.

If we look at the worst case, the French Revolution, it started with a deeply indebted Louis XVI.

Jacques Necker tried to restore investor confidence by publishing the Compte rendu au roi in 1781, which hid key expenses. This allowed the king to continue borrowing but did not fix the fiscal crisis.

Attempts at tax reform failed due to resistance from the nobility and the clergy who paid nothing, leading Louis XVI to convene the Estates-General of 1789. Which triggered a series of events leading to the revolution.

Revolutionary leaders seized Church lands and issued assignats to fund the state, but overissuance caused inflation. More durable financial stabilization came later under Napoleon Bonaparte through institutional reforms and, in part, revenues from military campaigns. He looted much of the wealth of the Italians who he “freed” from the Austrians.

The insight I get is that the debt is similar to NIMBY. Local interests benefit from an ever increasing debt, but collectively we are all hurt by it.

> I really need some politics-free scholarship on this.

It's impossible to discuss GDP without politics, could you describe exactly what it is about political discussion that you'd want to avoid?

As somebody already pointed, you should always ignore the Austrians.

Now, keep in mind that "business as usual" is different from "not an issue". The MMT folks will be able to tell you exactly what the consequences are (a hint, they are not very different from when it was 95% of the GDP), while the Keynesians will rush to tell you that the stuff the MMT people are talking about isn't as important as other stuff the government could be doing. Notice that both can be correct at the same time.

Empirically, at some level of inflation the Keynesians become just wrong. Most people usually stop being Keynesian at that level.

The problem is that our political leaders don’t really understand economics, and they think you can pick and choose the parts of an economic system that you like while leaving the “bad parts” (the parts that don’t benefit our benevolent rulers) on the table. So we get MMT inflationary printing with military Keynesianism and Austrian austerity.

None of these systems work if you only take a part of the system! Any of them would probably be viable, implemented properly with a good understanding and fine adjustments to account for reality, but you can’t mix and match!

As long as the debt is denominated in US dollars, default is a choice. The US cannot be forced into default; it can always choose to inflate away the debt instead.

Default itself will cause massive inflation, default is not a way to prevent inflation.

A ratio (e.g. 100%) of quantities expressed in different units can be useful. "How many years of GDP is the debt?"

Miles per gallon is another example. It's a useful number.

GDP provides a rough measure for how fast a country could drain its debt—similar to looking at debt-to-income ratio when issuing mortgages to individuals.

Interest is a percentage of debt.

Income through taxes is roughly a percentage of GDP.

You could also just compare interest spending vs budget, and lots of people do. Spending on interest is roughly $1T out of a total $7T with income of $5.23T

$1T of an incoming $5.23T is pretty concerning. Especially given projections that the $1T is likely to go up significantly over the next decade.

GDP is literally just in dollars as a unit

GDP is also an amalgam of various indicators of general economic activity: Consumption + Investment + Government Spending + (Exports - Imports). It might be all in dollars, but it is kinda like adding $X of Apples with $Y of Oranges.

Its good as a rough score to do relative comparisons between countries (and actually Debt/GDP is useful in that sense too), but as an absolute amount it doesn't mean all that much.

What matters is how much the debt servicing costs versus government revenues. Also how much that debt is growing (deficit) and/or what it would cost to reduce it.

But there's not much of a consensus around what is too much or too little.

I suppose 100% Debt/GDP is a good arbitrary number to raise the alarm, but it doesn't mean much on its own.

A quarterly debt to revenue ratio would be a lot more illuminating. There are very good reasons not to care if that ratio goes out of whack for one or two quarters. But any bro divergence that persists is bad.

This ratio isn't just better because the units match, you don't have to adjust the units for growth and inflation.

If someone has a debt it's entirely sensible to compare that to their yearly income, of course this tells you something. GDP is a proxy for potential yearly income in taxes for the government.

And now debt is 1 GDP year. I don’t see the problem.

Inflation is also a factor, in absolute terms. In 2025, interest payments totaled $970 billion, or 3.2% of GDP.

The US public debt-to-GDP ratio peaked at 106% in 1946 following WW2. Next year the US will likely match or exceed that, imo.

> It's a good time to be a debtor

So you mean rich people, for whom loans are easy to get so inflation always works in their favour

The debt is owed to other countries, and private bond holders.

They can request their money back, refuse to purchase future bonds, and if things get really dire, potentially go to war with the US (Don't worry, this is beyond unlikely).

Historically lending money to the US government has not been a problem. It's been a low earning but guaranteed return. Many of those loans have very long terms, and so even if it's a problem today, it wasn't when the loans were initiated, and it might not be when loans issued today come due.

Government debt is not like personal debt, for a lot of reasons that I am not smart enough to explain.

They continue lending to the US government because they are demanding a higher rate of return. The risk premium (i.e. the problem) is priced in.

Structurally a large chunk of the debt is owed to a different part of the federal government, the Federal Reserve.

That's an important question, and why US Gov Debt is different than Japanese Gov Debt, which also has a higher debt-to-GDP ratio than the US (due to decades of "zombie economy").

About 90% of Japan's debt is held by Japanese themselves, so it's much more insulated from a crisis that can't be resolved through domestic economy policy. (It could in theory print its way out of it.) Whereas about 25% of US gov debt (which is 3x Japan's in nominal terms) is held by foreign governments, including very large amounts by China. This, combined with the US being the main currency used for international transactions, gives those countries leverage over the US economy (though selling off the treasuries would impact their own holdings as well), and conversely means that US monetary policy has a global effect.