What will the US debt reckoning look like?

[WASHINGTON] In the US, public debt now stands at 99 per cent of gross domestic product. The Congressional Budget Office (CBO) expects it to reach 107 per cent of GDP by 2029 – surpassing the record set at the end of World War II – and to continue rising indefinitely. But until when? As Herbert Stein, who served as chair of the Council of Economic Advisers under president Richard Nixon, famously quipped: “If something cannot go on forever, it will stop.” But what will that “stop” look like?

A country can move off an unsustainable debt path in six ways: faster economic growth, lower interest rates, default, inflation, financial repression, or fiscal austerity. In the case of the US, one might be tempted to scratch all six off the list, one by one. But that would leave us in violation of Stein’s Law. So, which is it?

Faster economic growth is certainly the most appealing option. At least since the time of Ronald Reagan, US presidential candidates have promised to deliver it, thereby increasing tax revenues and reducing fiscal deficits, while cutting taxes. But these rosy scenarios rarely materialise. And, today, a substantial growth acceleration looks even less likely than in the past.