What is always missing in discussions of government debt is that it is an asset class, for which there is a demand; from individuals, financial institutions, foreign governments etc. Most US debt is held within the US. Such is the strength of the demand for US government debt that the current long-term bond rate is around 2.6%.
Almost no matter what, the US debt to GDP ratio will rise in the next few years, simply because the US is running a huge deficit (around 10% of GDP, compared with about 4% in Australia). Something has to be done to bring this deficit under control. This requires either raising taxes or slowing down spending growth, neither of which is easy for politicians to do.
Recently, Congress raised the debt ceiling--the maximum amount of debt that the US is allowed to have. There was a huge political bunfight this year, and many would have been left with the impression that raising the debt ceiling is a massively controversial event that doesn't happen very often. In fact, the debt ceiling has been raised 79 times in the past 50 years. So why all the fuss this year? Essentially it became a tussle between the two major parties, aggravated by the "Tea Party" rump of the Republican Party. What we saw was a bunch of egotistical politicians more interested in their own, or their party's agenda, than in the national interest. Thank God that could never happen in Australia!
Prior to the raising of the debt ceiling there was concern that the US may have defaulted on its debt; that is declined to pay an interest payment. This would never have happened; the government would have found some other spending to cut to free up the necessary cash. There is still on ongoing risk that US government debt will be downgraded, losing its triple A status. This would happen if the ratings agencies were not satisfied with the plans to reduce the deficit in the long term, and would have unknown but ugly consequences. I think it’s unlikely; a downgrade would put US debt below Australia's, France's, Germany's, Hong Kongs. Guernsey's and Lichtenstein's, for example.
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