The US federal debt load—$11.9 trillion as of last Wednesday—is fast approaching the $12.1 trillion debt ceiling set by Congress.
Lawmakers will likely raise the debt ceiling—they've done so 90-plus times since 1940.
There are fears today's rising debt will make it hard to pay increasingly massive interest payments or that it will cost the US its AAA rating by Moody's—all of which will hurt the economy in the long run.
History shows net public US debt relative to GDP is still well within manageable levels, and elevated debt loads in general won't prove an economic catastrophe as widely envisioned.
Turns out trying to reinvigorate an economy isn't cheap. US fiscal stimulus has been accompanied by a big and rising price tag. Of particular concern is the US federal debt load—$11.9 trillion as of last Wednesday—fast approaching the $12.1 trillion debt ceiling set by Congress. The Treasury is only allowed to issue debt up to the ceiling—once it's hit, the Treasury can't further borrow, including to finance existing debt, possibly leading to default. Sounds scary, right?
Not to fear. The ceiling is self-imposed by Congress, and lawmakers have raised it 90-plus times since 1940. Already, the House has passed a joint resolution to raise the debt ceiling and is awaiting the Senate's version. Of course, it won't be a politically popular decision—lawmakers want to appear fiscally responsible these days (who are they kidding?) and will likely espouse rhetoric against doing so. But it's gonna happen. Raising the debt ceiling is a lot easier than hand-binding the Treasury, so expect politicians to concede.
Ceilings aside, there are fears rising debt is a potentially catastrophic burden on the US economy—the US will find it hard to pay the increasingly massive interest payments or it will cost the US its AAA rating by Moody's. But the debt isn't dead weight—the enormous fiscal stimulus is helping to underpin a nascent economic recovery. To the extent recovery happens (very likely), many of these worries are moot because as GDP rises, so do tax receipts to service the debt, beginning to paying it off.
Public debt has become a very emotional, political issue recently. Stand where you will on the subject—we're not here to moralize. But the fact is, even at today's levels, major economies of the world have historically been able to carry this much debt—and often much more—alongside thriving economies and rising stock markets.
Ultimately, what matters is not the amount of debt itself, but debt relative to the size of the economy and the government's ability to service the debt (interest payments). History shows net public US debt relative to GDP is still well within manageable levels. Today's debt—approaching ~55% of GDP—is elevated but not as high as it's been. During the 1940s, following WWII, debt reached 109% of GDP and remained elevated into the 1950s—still the US markets and economy experienced robust growth.
Also note that US bond rates are very low today relative to history, meaning interest payments on today's new debt are near historic lows—particularly when compared to the last three decades, when interest rates were significantly higher.
But, as always, take a global perspective. Today, most major developed countries have elevated debt levels because of aggressive stimulus efforts. Japan's net public debt as a percentage of GDP is 165%, Italy's is 98%, Germany 74%, UK 55%, and France is at 54%.* Does that mean the whole world is in danger of over-indebtedness? No! It means the world is acting largely in tandem to combat the recession via powerful fiscal stimulus, making the policy response all the more potent for the global economic recovery.
For even more context, take a historic and global look. The UK has had, historically, vastly higher net debt levels than we've seen in the US without long-term harm. From 1750 – 1850, England was undisputedly the dominant world and economic power (more or less like the US is today)—and all the while carried net public debt in excess of 100%, peaking at 250%. If the then much-less developed UK economy was able to grapple effectively with debt levels four times current US debt levels—and get great growth out of it—the US surely can handle its current debt load. Simply put, history has proven these elevated debt loads won't prove an economic catastrophe as widely envisioned.
As countries continue toward recovery, debt loads relative to economic size will naturally come down on their own as they've done throughout history. Premature, forced actions to reduce debt now could strangle recovery—and we would no longer have to worry about debt's dead weight, but the economy's.
*Source: US Office of Management and Budget, US Department of the Treasury, Bureau of Economic Analysis; October 2009.