What could actually happen with the national debt.?

Question

What could really happen if the debt caught up to GDP. I know about interest rates and crowding out, but I keep hearing pretty much that its just bad so what exactly is bad about it?

Answer 1

Worst case scenario: the national debt grows so large that the majority of our tax money goes to paying interest leaving us with very little cash for government spending. However, many economists say that the national debt is actually about average for an industrialised nation when compared with GDP. Basically, this means that the amount we owe (debt) compared to the amount we earn (GDP) is about average. Thus, we bring in plenty of money in order to pay off our debt. I like to think of it like this: if a really wealthy person owes a lot of money but is proportionally equivalent to a poor person owing a small amount of money than the wealthy person is in a financially stable position. In this scenario the United States is the wealthy person. Therefore, it is unlikely that the interest payments on the debt will actually take up all of the federal budget because we can easily, in comparison to other nations, pay the debt off.

Answer 2

The size of the debt is only indirectly problematic. The cost of servicing the debt is what is a potential drag on the economy, as it could lead to an increase in taxation rather than what ought to happen which is a reduction in expenditures. Obviously, interest rates have a significant impact on this issue. If taxes are increased enough, or possibly even just the expectation of an increase in taxes, there could be a serious recession or worse a long-term decline in economic growth.

Answer 3

I agree -- people like to talk of it being "bad", but most of them are completely incapable of spelling out exactly what bad things might happen, in any realistic way.

There is one case of an industrialized country whose national debt far exceeds its GDP -- Japan. And, they continue running massive deficits year after year. It would be virtually impossible for the United States to catch up to the incredible levels of debt and deficit Japan has, even if we really tried to for decades.

Curiously, their interest rates a very low, and their major corporations don't seem to have much trouble raising sufficient capital.

Answer 4

Don't worry about your spending money. The yen is going to replace it soon based on a worldwide gold standard. Your gold and their standards, actually. The USA dollar will be worthless.
Eurodollars will struggle along for awhile until the French betray
everyone else in Europe. You can see the patterns, can't you?
Who would have thought the Chinese and Japanese discovering they both harbour common interests?