The Looming Threat of Excesive Debt on the US Economy

The U.S. economy has been experiencing a rising trend in its debt levels for several years now. This trend is a cause for concern, as the total debt in the U.S. economy is now more than 350 percent of the GDP, a level that is deemed completely unsustainable. As a result, most economists believe that a debt crisis is inevitable. However, what is not clear is what the next debt crisis will look like or how to see it coming. In this article, we will examine the factors contributing to the growing U.S. debt burden, the potential consequences of excessive debt, and the ways in which we can address this looming threat.

The Growing U.S. Debt Burden

The total debt in the U.S. economy has been surging in recent years, charging towards 350 percent of GDP when counting both the government and private sectors. A breakdown of the various sectors reveals that while the household and banking sectors have a lower debt burden than in 2008, there has been a very sharp buildup in other sectors. The federal government and business sectors have been the main contributors to the rising debt levels.

In 2008, the U.S. economy experienced a debt crisis centered around the household and banking sectors. The total debt in these two sectors combined to reach 207 percent of GDP in the aftermath of the crisis. Today, the debt in these two sectors is around 150 percent of GDP. Although this is an improvement, it is still high relative to history and too close for comfort relative to the threshold for negative effects.

If the banking and household sectors have lower debt, how is it that total debt continues to rise? The answer lies in the fact that the total U.S. economy has not deleveraged at all since the 2008 crisis. Rather, we shifted the debt from the problematic areas of the banking and household sectors to the government sector. At the time of the 2008 crisis, government debt was relatively low and way below the problematic range. This allowed the banking and household sectors to deleverage. However, since then, federal government debt has surged through the problem range and towards 100 percent of GDP.

The business sector, which includes all corporations and small private businesses, has been another source of massively increased debt and is flirting with the danger zone. Debt levels in the business sector are rising, which means that the two sectors that are rising are business and government debt, while the two sectors that are falling are household and banking sector debt.

The Consequences of Excessive Debt

Not all debt is bad debt, but with thousands of years of history with debt, we have learned a few things. A little debt tends to be helpful and boosts the economy, but a lot of debt is dangerous, brings instability, and is ultimately harmful. The question is, what is the magic line where debt transitions from being good to being harmful? Reviewing the research on debt, a range of 80 to 90 percent of GDP appears over and over.

Reinhardt and Rogoff, in their paper Growth in a Time of Debt, wrote in the concluding remarks that a debt-to-GDP ratio over 90 percent in the government sector leads to worse growth. The European Central Bank published a paper that drew a negative debt threshold around 90 to 100 percent but also noted that negative effects could start as low as 70 to 80 percent. The Bank of International Settlements published a paper titled The Real Effects of Debt, which drew a threshold for the government sector around 85 percent of GDP, the corporate sector around 90 percent, and the household sector around 85 percent. Across many peer-reviewed papers, we find the same.

Summary

Ultimately, the debate over the US national debt is likely to continue for many years to come. While there are certainly risks and concerns associated with a high level of debt, there are also potential benefits. As the US government continues to navigate economic challenges and uncertainties, it will be important to carefully consider the potential impact of its financial decisions on both current and future generations.