MNI: US Debt-To-GDP At 250% May Not Push Up Rates - JH Paper

The supply of U.S. debt over the next 75 years will eventually outstrip demand and force interest rates higher, though large fiscal adjustments could allow debt-to-GDP levels to increase sharply over time without pushing up interest rates, according to research presented Saturday to the Federal Reserve's annual economic symposium in Jackson Hole.

"Our calculations suggest that, in 2100, the U.S. could sustain a debt-to-GDP ratio of 250% at the same interest rates as today. However, achieving this requires a fiscal adjustment of 10% of GDP or more in every plausible scenario," wrote economists Adrien Auclert, Hannes Malmberg, Matthew Rognlie, and Ludwig Straub, who use a supply-and-demand approach to analyze the trajectory of U.S. aggregate wealth, real interest rates, and fiscal sustainability. 

"The longer this adjustment is delayed, the more government debt supply outstrips its demand, eventually making government debt unsustainable," they wrote. "Making debt sustainable requires a fiscal adjustment of nearly 12% of GDP—a dramatic increase given the current tax-to-GDP ratio of around 17%."

The fertility rate has fallen from over three children per woman in the 1950s to 1.6 today, causing the population to grow older, and income inequality has risen sharply since the 1970s, they wrote. In the last few decades, government debt has also risen along with the value of private assets, while the net foreign asset position has fallen to a record low. (See: MNI INTERVIEW: US Budget Deficit Unsustainable - Ex-CBO Chief) 

"While there is sufficient demand for assets in the aggregate, the market cannot absorb such a large increase in government debt without eroding the government’s funding advantage," the report said.

"Taking stock, our analysis suggests that the U.S. economy could look in 75 years a little like Japan does today: much higher debt levels, much higher outlays on old-age programs, and nevertheless similar or lower interest rates," the economists from Stanford University, University of Minnesota, Northwestern University, and Harvard University said.