ECONOMICS IN THE RED ZONE

October 21, 2009

Even as President Obama's health care gambit moves toward the endgame, the massive expansion of U.S. borrowing -- both public and private -- that has occurred in the past year is already pushing the U.S. fiscal situation to a very dangerous place.  How big a debt is too big, and has the United States passed that point?

The National Review analyzed U.S. Treasury Department data that compared the external debt (debt held by foreigners) of the United States to the external debt of middle-income countries that experienced default (or restructuring) between 1970 and 2001.  In both cases, the debt is scaled by gross national product (GNP), and reflects, for those countries that defaulted, total debt outstanding in the year of default.

The findings tell a chilling tale, says the National Review:

  • The U.S. debt is now higher relative to our national income than it was for the typical middle-income country that defaulted on its debt in the 31 years of the sample.
  • The U.S. total external debt has reached 94 percent, while public external debt is 24 percent, of GNP this year.
  • This puts the United States in the company of Latin American countries like Argentina, Brazil, Chile and Ecuador (other countries outside of Latin America include Jordan and Egypt); these are all countries that defaulted on their debt during the period under consideration.
  • The United States is now in worse shape than was the typical Latin American country that defaulted.

The United States can continue to borrow and spend so long as foreign lenders continue to fund the country's private loans, and these lenders might oblige for decades.  On the other hand, a precipitating event -- say the passage of a large expansion of entitlements -- could easily set off the kind of panic that has devastated debt markets in the past, says the National Review.

Source:  Kevin A. Hassett, "Economics in the Red Zone," National Review, October 19, 2009

 

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