Can the U.S. Debt/GDP Ratio Reach 250% Without Collapse? Jackson Hole Paper: The Prerequisite Is...

According to a paper presented at the Jackson Hole Global Central Bank Annual Meeting last weekend, the U.S. government debt-to-GDP ratio may reach 250% in the future without a significant rise in bond yields, but the prerequisite is whether the U.S. government can implement fiscal adjustments as soon as possible...

The paper, co-authored by economists including Adrien Auclert of Stanford University, Hannes Malmberg of the University of Minnesota, Matthew Rognlie of Northwestern University, and Ludwig Straub of Harvard University, delves into the relationship between fiscal deficits, government debt, and monetary policy.

They pointed out that the large aging population in the U.S., which possesses savings, may consider investing in government bonds, meaning the government has room to finance its additional spending by increasing debt. The paper states, "Before fiscal consolidation is achieved, a race will unfold between the growing demand for assets from the aging population and the increasing debt issuance required to fund related government spending."

The paper notes that without significant adjustments, debt supply will eventually exceed demand, forcing interest rates to rise. However, in the authors' baseline forecast, there is still a possible path to push long-term debt to 250% of GDP without causing interest rates to rise.

Currently, the "Big and Beautiful Act" passed by the U.S. Congress in July has sparked debates in the U.S. about the dangers of rising debt levels and their potential impact on borrowing costs. By the end of 2024, U.S. government debt held by the public is expected to account for about 97% of GDP.

In a forecast released in January, the Congressional Budget Office (CBO) projected that the debt-to-GDP ratio would rise to 117% by the end of 2034. After the passage of the "Big and Beautiful Act," the CBO estimated that this legislation would increase the ratio by an additional 9.5 percentage points.

"Our calculations show that by 2100, the U.S. could sustain a debt-to-GDP ratio of 250% while maintaining interest rates at current levels. However, achieving this requires fiscal adjustments equivalent to 10% or more of GDP," they stated.

The paper emphasizes, "The longer the (fiscal) adjustment is delayed, the more government debt supply exceeds demand, ultimately making government debt unsustainable."