Open Question: What is the Optimal Level of U.S. Public Debt?

by Bruce Webb

Back in 2000 Alan Greenspan warned Congress about the potential disappearance of the long bond in the face of continuing surpluses. He probably knew at the time that he was just feeding the appetites of tax-cutters, and not say advocating for using those surpluses for something like Universal Single Payer, but he wasn’t crazy, because to some extent the world is dependent on the existence of SOME amount of U.S. Treasuries just to keep the gears of the world economy going. For the time being the U.S. dollar is the biggest component of most other countries foreign exchange reserves and is also used to buy and sell many commodities, particularly crude oil.

So the question is How Low Can We Go? Where is the sweet spot in terms of the ratio of U.S. Debt Held by the Public and world GDP?

Now we know the answer in relation to Social Security, at least the statutory answer. The Trustees are mandated to target a Trust Fund ratio of 100 or one year of future cost at any given time. And since the annual cost of Social Security goes up every year due to changes in population and inflation the result is that even a perfectly balanced system will contribute that much more to total Public Debt (Intragovernmental Holdings combined with Debt Held by the Public) each year. For example you can say all we ‘really’ owe to Social Security is the amount of principal above a TF ratio of 100 plus the costs of servicing the remaining reserve, or $1.8 tn out of $2.5 trillion plus interest on the total.

And it would seem that the same applies to the world economy. How much of that $8.5 trillion are we actually on the hook for? Certainly we owe interest on the whole amount, but realistically how much on net will EVER get redeemed even under ideal economic conditions?

This is not a rhetorical question to which I will spring some nifty answer under the fold, this post doesn’t have a ‘read more’. Anyone care to kick this one around?

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