Will Debt Sink the American Empire?

After growing for decades, this year the U.S. debt will roughly match its GDP. Throughout history, nations that blithely piled up their obligations have eventually met unhappy ends

By Gerald F. Seib of The WSJ. Excerpts:

"History, however, offers some cautionary notes about the consequences of swimming in debt. Over the centuries and across the globe, nations and empires that blithely piled up debt have, sooner or later, met unhappy ends.

Historian Niall Ferguson recently invoked what he calls his own personal law of history: “Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Habsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the U.S. beginning this very year.” 

Indeed, the Congressional Budget Office projects that, in part because of rising interest rates, the federal government will spend $892 billion during the current fiscal year for interest payments on the accumulated national debt of $28 trillion—meaning that interest payments now surpass the amount spent on defense and nearly match spending on Medicare."

Still, a look back at history is not reassuring. “Even if a country issues the leading reserve currency, even if a country is the dominant geopolitical power, that just doesn’t bail countries out,” says J.H. Cullum Clark, director of the Bush Institute-Southern Methodist University Economic Growth Initiative. “They do lose that status.”

Clark, who has written about history’s lessons on debt and international power, points to the Roman Empire as an early cautionary tale. After establishing their empire as the world’s most powerful, Rome’s leaders began spending lavishly on imperial administration and the army in the third century. Emperors financed the resulting debt by debasing the currency, which generated high inflation. That weakened the empire’s stability and defenses, leading to its demise in the fifth century.

After establishing a foothold in the New World, Spain financed its military adventures and globe-spanning empire with extensive borrowing from abroad and high taxation, eventually losing its status as Europe’s greatest power. In their look at the history of international financial crises, “This Time Is Different: Eight Centuries of Financial Folly,” economists Carmen Reinhart and Kenneth Rogoff note that Spain “managed to default seven times in the 19th century alone, after having defaulted six times in the preceding three centuries.”

France traveled much the same path and defaulted frequently on its debt. Ultimately, profligate borrowing and spending by the court at Versailles caught up with the royals, producing deindustrialization and fiscal crises that led to the revolution of 1789.

China’s Qing Dynasty went through a similar cycle and encountered a similar fate. It was a leading world economic power, but spending and foreign borrowing in the 19th century led to damaging underinvestment in the infrastructure needed to keep advancing.

Great Britain may offer the most compelling parallels. It oversaw the world’s most far-flung empire through the 18th and 19th centuries before war spending, including the fight against the American Revolution, produced high debt. It recovered but by the 20th century found that it could no longer afford the spending required to both maintain an army and navy to police the empire and to finance rapidly growing social programs. Debt began crowding out other investments, and economic weakness sapped the strength of the British pound. The pound ceased being the world’s leading reserve currency, and the British Empire soon declined.

Clark says that, in the current environment, the event triggering a debt crisis could be a downgrade of America’s credit rating or the refusal of international financiers to continue lending. The U.S. isn’t in that position yet."

Notice that the graph refers to "publicly held debt." Some of the debt owed by the U.S. Treasury is owed to the Social Security Administration and the Federal Reserve, for example (sometimes referred to as inter-agency borrowing). That kind of borrowing is not included in the graph above in the "publicly held debt."

The total debt is higher than the $28 trillion the article mentions and is well above the GDP (the article's sub-title says "this year the U.S. debt will roughly match its GDP").

How much higher is it? The U.S. National Debt Clock shows about a $34.8 trillion debt right now which is 122% of GDP.

Related posts:

Just Four Large Countries Have a Higher Debt Burden Than the U.S. (2018)

Leaders In Gross National Debt As A Percent of GDP Among Advanced Economies In 2017 (2018)

The Deficit Trials 2017 A. D. (2018) This is about a TV commercial back in 1986. It paints a bleak picture of America in the future, presumably caused by the growing national debt ($2 trillion then). It shows young people putting the older generation on trial.

Alexander Hamilton And The National Debt (2016)

The Possible Impact Of A Lower Credit Rating For The U.S. Government (2011)

Gross public debt exceeding about 90% of annual economic output can slow growth (2011)

See also Americans start caring more about deficits and the national debt when the party they oppose runs them up by John V. Kane of New York University and Ian G. Anson of The University of Maryland. Excerpt:

"In the past two decades, US budget deficits have skyrocketed, and the national debt is now over $22 trillion. But do Americans care about the size of deficits and the national debt? In new research, John V. Kane and Ian G. Anson find that people tend to care more about the deficits and debts when they are increased by presidents from the party that they oppose. Both Republicans and Democrats, they write, become less concerned about governments running deficits when their President is in charge."