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Of Debt and Deficits and the Dollar System

By force of preset agendas, conservatives and liberals react to debt headlines like Pavlov’s dogs.

The chiming of the debt clock at $40 trillion—just as Voyager 1 reached one light-day’s distance from Earth and for similar reasons—has provoked a flood of comment. Milestones are milestones: They measure, and they help pass the time. Otherwise, they have no intrinsic importance.

By force of preset agendas, conservatives and liberals react to debt headlines like Pavlov’s dogs. For one side, it’s about Social Security and Medicare. For the other, it’s about making the wealthy pay. There is surely good reason to control healthcare costs. And we do need progressive taxation, to restore the democratic middle-class society we once enjoyed. Neither has to do with the so-called problem of the federal debt.

Is the federal debt “sustainable”? The simplest answer is: “obviously.” United States debts are due in US dollars produced by the US itself. All debts of that type are sustainable: They can always be paid, exactly as promised, “debt limit” or no.

Fans of complexity have cooked up a criterion: a stable or declining ratio of government debt to gross domestic product. This metric compares growth of debt to growth of GDP. Here the key determinant is the interest rate on the existing debt. So long as that rate (averaged over all the maturities) is below the nominal (meaning real growth plus inflation) GDP growth rate, the debt/GDP ratio will eventually shrink. When Secretary Bessent says that we can “grow out of the debt,” this is the commonsense meaning of that shorthand.

Guess what? Today’s federal debt interest rates are well below today’s growth of GDP. We are already “growing” out of the so-called problem. You have to add in the current deficit, but over time it’s the interest rate and the growth rate that decide........

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