The federal government’s outstanding financial obligations now total some $34 trillion, about 123 percent of the nation’s gross domestic product (GDP), near a historic record. Meanwhile, the latest Congressional Budget Office estimates announce deficits of over $1.5 trillion a year in the coming years, between six and seven percent of GDP. While this flow of red ink promises to add significantly to the already massive pile of outstanding debt, Washington seems not to have paused to consider the potential damage implicit in these trends, much less to entertain ways to arrest them. The prospects are far from encouraging.

There are some—in Washington certainly, but also on Wall Street and in academia—who dismiss such concerns. Essentially, these analysts take what might be called a “trader’s view.” The bond-buying public seems to be coping well with the flow of new government obligations. Wall Street takes all that each Treasury auction has to offer. Rates and yields on Treasury debt show neither investor fears of excess nor any ugly economic consequences. The ten-year bond, for instance, sells presently at a yield slightly above 4 percent, only a little higher than inflation. If there were reason to fear the fate of federal finances, these optimists argue, buyers would demand much higher rates, perhaps closer to the 8 percent yield they demand from junk bonds, where there is reason to fear trouble. Those who hold this perspective might point to Japan, where government debt amounts to 263 percent of the country’s GDP, and there has been no........

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