The U.S. Is Well On Its Way To Being In A Debt Trap

Commentary of economists Rogoff and Reinhart is often used as a point of reference concerning thresholds of debt levels that trigger a debt trap. After the publication of their book on the topic, there were rebuttals from the debt-doesn’t-really-matter crowd.

I did a cursory reading of these counterpoints and can only say that their arguments were circular, anal, counter-intuitive, and not even worth discussion. I really try to keep an open mind, but sometimes in life you come across people you know are BS’ing you. You know it because their lips are moving.

For those who argue it does matter, one number being tossed around is the level at which debt service equals 30 percent of tax revenues. Once interest payments take 30% of tax revenues, a country has an out-of-control debt trap issue. When you think clearly about it, this just makes sense, as the ability to dodge, weave and defer is pretty much removed, as is the logic that it will be repaid in a low-risk manner. The world is going to be a different place when the US is perceived to be in a debt trap.

I suspect the problem will rear its ugly head well before this 30% number is hit, as markets start discounting the trajectory by hiking interest rates because of poor credit quality and/or inflation (or more accurately stranguflation). Naturally that question should be asked in terms of the recent and sudden uptick in Treasury note and bond rates that appeared strongly correlated to the latest round of tax “stimulus” and handouts, and the “unexpected” reaction to QE2. The latter is nothing more than a brazen, dangerous gamble to monetize the debt. Sure the BS crowd is claiming economic growth is the causa proxima, but that feels like utter nonsense. Could it be that the markets at long last are anticipating a very bad result from QE2 and even more Gumnut largess? (more)