Many posts have discussed federal deficits and the federal debt.
Neil Irwin at Axios reports on federal debt exceeding 100% of GDP.
Catch up quick: The Commerce Department last week reported $31.9 trillion annualized GDP in Q1. That surpasses the $31.4 trillion in debt held by the public on the last day of the quarter.The U.S. debt-to-GDP ratio briefly topped 100% during the early days of the COVID-19 pandemic when economic activity collapsed. But before that, it hadn't exceeded that ratio since the aftermath of World War II.
The ratio is on track to continue rising, with the Congressional Budget Office projecting it will reach 120% in 2036.
Zoom in: Consider a family with $100,000 in debt and an annual income of $100,000. Is their debt excessive? The answer, of course, is that it depends.If the family ran up that debt due to one-time expenses that won't recur and has a low interest rate, rising income and day-to-day spending in line with what they bring in, they're probably fine.If, on the other hand, they ran up that debt to support routine living expenses in excess of their earnings and have a high interest rate and stagnant income, it would raise serious alarm bells.
Zoom out: The U.S. government is more like the latter family. The CBO projects federal revenue in the next few years will be 17% to 18% of GDP, while expenditures will be north of 23% of GDP.That gap, of around 6% of GDP, is higher than the CBO's GDP growth projection, which would imply an ever-rising debt-to-GDP ratio.
In those projections, the federal government's interest expenses soar to new heights as a share of the economy — surpassing $1.5 trillion and 4% of GDP in 2031.
That assumes interest rates remain broadly in their current zone, with a 10-year Treasury note yielding about 4.4% — and that bond investors prove willing to continue financing an ever-growing debt at those levels.
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The bottom line: The national debt hitting 100% of GDP isn't a worry in and of itself, and it isn't some magical threshold. What is worrying are the details of how it got there, and what comes next.
