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The US won't spiral into a debt crisis anytime soon, Paul Krugman says.
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That's because economic growth is larger than the interest rate on government debt.
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Some research suggests the government's debt levels may not matter at all, the top economist said.
The US isn't spiraling into a debt crisis because it's growing too fast, according to Nobel laureate Paul Krugman.
The top economist pointed to Fitch slashing its credit rating on US debt last week, which spooked markets and sparked a sharp sell-off in stocks. That move has lowered the faith in US debt assets, some commentators have argued – but the economy is just too strong to have an imminent debt crisis, Krugman said.
"Bottom line: Is the United States likely to face a debt crisis anytime soon, or even in the next decade or two? Almost surely not," Krugman said in a New York Times op-ed on Friday.
That's because a debt spiral is caused by the interest rate on government debt being significantly larger than economic growth, which isn't the case. Even with the Fed's aggressive hiking of interest rates over the past year to tame inflation, the rate on inflation-protected 10-year bonds hovers around 1.83%, Krugman said. Meanwhile, US GDP grew 2% over the past two quarters, according to the most recent estimates.
"So if we do face the prospect of large future increases in debt – which we do – interest payments on existing debt aren't a major culprit," he added.
The government's debt servicing costs will likely hit $663 billion this year the Congressional Budget Office estimated, a small fraction of the US's $26.8 trillion current-dollar GDP.
And though the national debt balance has topped $32 trillion this year, some research suggests the level of US debt doesn't matter at all, Krugman said. Historically, debt crises are rare, and haven't led to the economic catastrophe that doomsayers have warned of. France, for instance, which inflated part of its debt away in the 1920s due to falling market confidence, ended up having a prosperous decade with rapid economic growth.
It's also rare for governments to pay off their large debt balances in the first place, Krugman said in a previous op-ed, meaning the US will likely not have to pay off its mountain of debt.
Krugman's views are contrary to more bearish Wall Street commentators, who have warned of coming debt troubles as interest rates rose rapidly over the past year. The economy could enter a "doom loop" as debt burdens grow costly in a high interest rate environment, top economist Nouriel Roubini warned. Bank of America, meanwhile, warned there could be up to $1 trillion of corporate debt defaults if the economy faces a full-blown recession, though the bank no longer expects a downturn this year.
Read the original article on Business Insider
Top economist Paul Krugman says the US economy is growing too fast to spiral into a debt crisis - Yahoo Finance
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