US government debt has now risen to the point where it is unsustainable. This is what Federal Reserve Chairman Jerome Powell said. “He said the U.S. national debt is actually unsustainable,” he said. “A central banker saying this is remarkable,” says macroeconomist Edin Mojacik.
Is it appropriate for him to say that?
At first he also said it was budgetary policy, so it belonged to governments. But the journalist he spoke to kept asking questions. He then said that the US national debt was unsustainable in the long term. The reason he gave for this is that debt is growing faster than the economy. In other words: The growth of the US economy comes largely from increased debt, and you get less and less extra economic pie for every dollar you borrow.
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Now that Powell has said this, what is the result?
To my knowledge, never before in recent decades has a central banker commented on this matter. But it has implications for the future. And I’m not talking about within forty years, but closer. If the national debt is unsustainable and you do nothing about it, it could lead to disaster. The reason for this disaster may be that interest rates are too high. This is something the central bank is all about.
What happens next?
This could mean that the Fed’s room to keep interest rates low becomes very limited in the future. Because if you lower interest rates, you risk inflation expectations rising, which leads to structurally higher long-term interest rates. These are precisely the interest rates that matter when we talk about government debt.
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Does it stop there?
We’re talking about the US national debt, which is about 100% of the economy. The United States enjoys a special position, because the dollar is in fact the global currency. All other countries will recycle and invest in their dollars, which will cause US interest rates to be lower than they would otherwise be. This is a great advantage for America. But the economy is young and innovative and is generally performing better than many European economies. If you were to describe such a country’s national debt as “unsustainable,” what kind of term should we use to describe the debts of Italy, France, and Spain?
Can anything be done about it?
European budget rules must be applied. Powell advised discussing it as adults. He’s basically saying that American politicians shouldn’t be so childish, because this is a big problem for the future. I would like to offer this advice. I hope someone from the European Central Bank will use the same words towards European politicians.
