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The Janus of Debt

With the US again flirting with a default crisis as Republicans balk at raising the national debt ceiling, and with government debt levels everywhere reaching new highs following COVID-19, questions about the proper role of debt have returned. The truth seems to be that sustainability of government borrowing is as much about politics as economics.

PRINCETON – Debt is back in the headlines. The COVID-19 pandemic has compelled an enormous expansion of public borrowing, and odd fiscal rules setting a ceiling on government debt in the United States have left that country flirting once again with the possibility of sovereign default.

According to the law on the books, $28.5 trillion in federal debt is too much. If Congress continues to insist on this position, the US will exceed its debt limit this month, and chaos will ensue. The world needs the US dollar to keep functioning as a safe asset and as the foundation of a global payment system for cross-border transactions. There is a new nervousness in bond markets around the world.

How much debt is too much? How does one know when consolidation is the right approach? And how should it be carried out? The division of views on such questions is neatly captured in an anecdote from debt-laden contemporary Britain. Chancellor of the Exchequer Rishi Sunak thinks that a massively overweight man with high blood pressure should not eat another hamburger. But Prime Minister Boris Johnson suspects that another hamburger won’t make too much of a difference to a patient already in that condition.

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