US national debt at $39 trillion raises concerns beyond debt-to-GDP
The U.S. debt load is lower than Japan’s by one common measure, but economists say its borrowing speed leaves less room in a downturn.
By Daniel Okafor · Business Editor
3 min read
The US national debt, at $39 trillion, is drawing warnings even though America does not rank at the very top when debt is measured against economic output. Economists cited by Fortune say the concern is less about one ratio than about how fast Washington is adding debt and how little room it may have to respond to a recession.
The United States has the largest national debt in absolute terms, more than twice China’s $18.7 trillion total, according to the IMF’s World Economic Outlook data published in April and cited by Fortune. Relative to the size of the economy, however, the U.S. debt ratio is about 126%, below Japan’s 204% and Singapore’s 172%, according to the same IMF data.
Debt-to-GDP compares a country’s public debt with the annual output of its economy. A 200% ratio, such as Japan’s, means public debt is about twice the size of yearly economic output; economists do not treat any single threshold as an automatic crisis point.
Why is the U.S. national debt a concern if Japan owes more versus GDP?
Apollo chief economist Torsten Slok has pointed to the pace of U.S. borrowing as the main risk. He cited federal debt data showing the United States is adding about $7 billion a day, and wrote that the country has entered no recession with so little fiscal room.
Slok said in an Apollo blog post that the usual recession response becomes harder when the federal borrower is already stretched. In his view, Washington has less capacity to add stimulus through tax cuts or infrastructure spending, while Federal Reserve rate cuts could add inflation pressure and affect demand for new government bonds.
That concern differs from the way some economists view Japan, even with its much higher debt-to-GDP ratio. Jack Salmon, a research fellow at the Mercatus Center at George Mason University, wrote that Japan and the United States have different debt profiles: Japan is the world’s largest creditor nation, while the United States is the world’s largest debtor.
Fortune reported that about 90% of Japan’s government debt is held domestically through local banks and insurance funds. That structure reduces reliance on foreign investors who might sell bonds during periods of global stress, according to the analysis.
Japan also has a household saving rate worth about one-third of GDP, roughly double the U.S. level, according to IMF research cited by Fortune. Those savings are linked in the analysis to households preparing for longer retirements and help support domestic ownership of government debt.
Salmon warned, however, that Japan should not be treated as proof that advanced economies can keep borrowing without consequences. He wrote that Japan’s experience is now testing the limits of debt tolerance.
Fortune cited pressure on Japan from a weaker yen, higher oil prices tied to the Iran war, U.S. inflation worries and stronger demand for the dollar. Long-term Japanese bond yields have also been rising, and higher interest rates would increase the cost of servicing debt, according to the report.
Some economists question whether debt-to-GDP is the right way to judge fiscal risk. Jonathan Berk, a Stanford Graduate School of Business professor and economist, told the school that comparing debt with annual output can resemble comparing a mortgage balance with one year of rental income, because it leaves out other costs and affordability factors.
Berk said he does not necessarily see the debt picture as the doomsday scenario some critics describe. The debate leaves the United States facing two linked questions: how much debt investors will keep absorbing, and how much policy flexibility Washington has if growth turns down.
This story draws on original reporting from Fortune.