The Fiscal Singularity is Near
By Arnold Kling
In my recent paper, I started with budget projections that had debt held by the public reaching 78.8 percent of GDP by 2020. In fact, the most recent CBO projection of the Administration’s Budget offers a forecast of public debt held by the public reaching 90.0 percent of GDP by that date.
I don’t think we will get much past 2020 along our current policy path. I need to work out scenarios more carefully, but the interest cost of the debt as a percent of GDP is the debt times the nominal interest rate. If the nominal interest rate were 10 percent in 2020, then the interest alone would be 9 percent of GDP. Since non-interest spending also would exceed projected revenues, we would be adding nearly 10 percentage points to the debt-to-GDP ratio in just 2020, with ever-increasing amounts in subsequent years. Nobody is going to want to buy Treasury securities given that outlook.
Yes, one option is to just print money to pay off the debt. The money that we print is called high-powered money, also known as the monetary base. Is it fair to assume that the velocity of high-powered money is about 10? (I think that the ratio of nominal GDP to the stock of high-powered money is about 10 these days.) If so, then imagine that the interest on our debt is 10 percent of GDP and we want to print enough high-powered money just to pay the interest on the debt. Then we have to inject an amount of high-powered money equal to 10 percent of our GDP, which at a velocity of 10 would mean a 100 percent increase in nominal GDP, which would be nearly all inflation. That is hyper-inflation territory, which would be roughly as catastrophic for savers as defaulting on the debt.
This is crude arithmetic. I am not a fancy theorist like Paul Krugman or Brad DeLong or Mark Thoma, who are all convinced that the deficit should be higher rather than lower. But I wish somebody could explain to me why the crude arithmetic is not scary.
[UPDATE: a commenter points out that the three economists I cited in the preceding paragraph, like other economists, say that we need to reduce the long-term deficit. But my point here is that “the future is now.” It seems to me that we are already at the point where we do not have the luxury of separating the long-term issue from short-term policy.]