Y\’know this thing we keep being told? That we should just borrow our way out of the slump? For there\’s no way that anything else will work: all this talk of a bond buyers\’ strike, of interest rates rising to offset any stimulus just not being about to happen?
The yield on 10-year Treasuries – the benchmark price of money worldwide and the key driver of US mortgages rates – has rocketed to 3.3pc, up 35 basis points since President Barack Obama agreed on Monday to compromise with Senate Republicans on tax cuts.
The US tax deal adds $1 trillion of stimulus over two years, according to BNP Paribas. America\’s budget deficit will remain stuck near 10pc of GDP, not just in 2011 but also in 2012. This will push gross public debt to 110pc of GDP under the IMF definition, near the brink of a debt compound spiral.
Now, it\’s true, if interest rates stay low then debt of 110 % of GDP isn\’t an enormous problem: as long as growth returns pretty quickly and boosts GDP thus bringing that %ge down.
The problem is that what if interest rates continue rising? to 8%, say, 9%? While perhaps not all that likely at present, certainly not impossible. And at that point there is a real problem. When debt interest payments get to around 10% of GDP this is, historically, about when we start to see the possibility of default soar.
And of course, the more likely people think this might happen the more they\’ll sell the bonds increasing interest rates and thus making the event itself more likely to happen. Trying to print money or to inflate your way out at the point just makes things worse.
No, I do not say that the US has now entered such a debt spiral. Just pointing out that there is indeed a limit, one which is now peeking its nose over the horizon.