Is the U.S. Hitting the Red Zone?

Is the U.S. Hitting the Red Zone?

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It shouldn’t come as a surprise, but U.S. government debt is approaching yet another grim new milestone.   Bloomberg News’ Chart of the Day, based on IMF projections, shows that gross federal debt could exceed the United States’ GDP as early as 2012. 

Is that a meaningful milestone?   That is the subject of a fierce new fight among economists, a fight that will ultimately be decided by what bond investors do.

The key word here is “gross,’’ meaning total U.S. federal debt including both debt held by the public and debt that the government owes itself – mainly bonds held by the Social Security and Medicare trust funds.

By that measure, federal debt just hit $13 trillion and is already equal to 90 percent of U.S. gross domestic product.  The economists Kenneth Rogoff and Carmen Reinhart, co-authors of an exhaustive study of financial crises going back 800 years, have argued that 90 percent appears to be the economic red zone for debt.   Countries with gross debt above that level, Reinhart recently told President Obama’s fiscal commission, saw their economic growth slow markedly.

But many economists argue that “gross’’ debt is a bad measure, because credit markets aren’t affected by debt the government owes itself.   The more traditional measure – “publicly-held debt’’ – is just under $9 trillion, or slightly  below 60 percent of G.D.P.

Either way, most economists agree that the federal debt is growing at an unsustainable pace.   Bill Gross, chairman of PIMCO, the world’s biggest bond management firm, comes up with a different debt milestone in his June newsletter. 

Gross charted total US debt – private and public –  as a share of GDP.   That hit what looks like an all-time high of 360 percent in 2008, though it’s not clear what happened since then.  (Given the collapse of private lending during the crisis, the ratio could be lower today.)

But the U.S. has plenty of company, with the fiscal turmoil in Europe rattling political leaders and bond markets far more than the mountain of U.S. debt.

Over the weekend, G-20 finance ministers meeting in Busan, South Korea, agreed on a notable shift in the fiscal message of their final communiqué.

Instead of putting primary emphasis on the need to maintain economic stimulus, the leaders inserted new urgency about deficit reduction:

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” the communique declared. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.”

To read the full Debt Watch series, go here.

The Fiscal Times , an independent business venture, is funded by Peter Peterson, but is not affiliated with his foundation.