Ep47 “Is the U.S. National Debt Sustainable?” with Mohamed El-Erian

Debt Sustainability Measures

• There are three measures of debt sustainability: stock measure, flow measure, and broader balance sheet measure. (19m6s)
• Debt to GDP does not consider a country's wealth against its debt, interest payments relative to earnings, or vulnerability to sudden stops in financing. (19m46s)

Dealing with Excessive Debt

• There are four ways to deal with excessive debt: grow out of it, austerity, financial repression, or outright restructuring or default. (21m9s)
• Economic growth and population growth have historically had important synergies. (24m36s)

US Debt and Economic Context

• The US national debt is currently at \$34 trillion, the highest it has ever been. (2m28s)
• While the ratio of national debt to GDP has increased significantly from 1975 to 2024, from under 40% to over 120%, this measurement may not be the most informative. (3m40s)
• Comparing the national debt to the total US stock market capitalization, the ratio has remained relatively flat since 1975. (5m55s)
• The total interest expense to GDP ratio has remained relatively stable. (7m7s)
• It would have been unthinkable for the United States to have a fiscal deficit of six to seven percent of GDP while simultaneously having an unemployment rate at or below four percent for 30 straight months. (13m29s)
• The US benefits from relative comparisons in that while it may not have pristine economic characteristics, it is in a better position than other countries and therefore attracts funds into its bond market. (14m40s)

Japan's Debt Management

• Japan, despite having one of the world's highest debt-to-GDP ratios, enjoys very low interest rates, making its debt manageable. (9m19s)
• The market appears to grasp the dynamics of factors like demographics and industrial trends, which explains Japan's ability to borrow at low rates despite a shrinking population. (11m50s)
• Japan has been able to manage a large debt-to-GDP ratio, and quantitative easing has shown that central banks can purchase trillions in government bonds and mortgages, leading many in the market to believe that there is time to find a path to turning the debt dynamic around. (16m38s)

Current Economic Challenges

• The United States is in an arms race with other countries due to advancements in artificial intelligence and drone technology. (27m45s)
• Innovations, particularly AI, have both positive (80%) and negative (20%) aspects that need to be addressed. (28m33s)
• Central banks might prefer an equilibrium inflation rate of 2.5% to 3% due to a shift from deficient aggregate demand to deficient aggregate supply. (30m44s)
• Supply chains are being influenced by national security considerations and companies are prioritizing resilience over efficiency. (31m1s)
• The increase in debt and spending due to the pandemic is not being treated as temporary and there is no common understanding that it needs to be reversed. (33m59s)