I'm not asking about Federal Reserve here. I know "the way a government uses debt is very very different from the way you and I use debt" for at least these five reasons.

  1. What's the maximum money amount the US government can spend on mitigating COVID19?

  2. Isn't there some maximum reasonable debt to GDP ratio? Undoubted it can't be infinity!

My research. I accept that

  1. "US government debt is not the same as household debt". "Given the fact that there is serious demand for US debt, the optimal level of debt is most likely positive, not zero. Continued demand for US debt also implies that the government can indeed run deficits, even in the long run.".

  2. US's sovereign "debt is big, but it's not concerning because it's about the same size as our GDP. It should probably be at least a little smaller, which is simple and hard because everyone knows what needs to be done (higher taxes and lower spending) but nobody is willing to do it."

    "Bill Clinton ran a study on what would happen if we paid off the debt (it was a possibility if the budget had stayed how it was under him), and the conclusion was that the US shouldn't go out of debt. The US debt interest rate is the way that interest rates all over the world are measured. It's considered the safest investment in the world. What most economists talk about isn't paying the debt back but lowering how big it is in proportion to the GDP. The best way to do that is to grow the GDP, which is why that ratio is actually falling right now."

  3. "Looking at debt to GDP in a vacuum, or just looking at the raw debt number, is misleading. It does not take into account the immense value of the assets the government has to secure their debt. It does not account for the fact that a great deal of the US debt is essentially owed to itself. It also does not account for arguably the most valuable asset on the planet, which is sovereign control of the global reserve currency. The financial value of this authority is impractical to quantify, but being the only party allowed to produce the US dollar is worth more than anything I can think of. As long as the US has military supremacy, I do not expect this to change."

  4. US sovereign debt "is in the form of treasury bond. 30% of the debt is owned by Private US Citizens and US companies. 30% of the debt is owned by various parts of the US Government such as Social Security as points of investment. And finally, 40% is owned by various foreign entities."

  5. US sovereign debt "is not due all at once, it is in the form of Treasury bonds that come due at set periods of time. Just like you have no issues with your mortgage so long as your income each month is high enough to make the payments a country has no issue so long as their income is high enough to make their payments when they come due.". Undoubtedly the US "has a massive economy that can, so far, support trillions of debt while still making payments regularly." "The US has a substantial debt but is still easily able to service that debt + interest so in the grand scheme of things it is basically a non-issue. That is until we can no longer do that which then make it a very big problem. However, that is quite unlikely in the foreseeable future because the US has never defaulted, has a large and wealthy economy, and is politically and geographically stable. Simply put - we're a pretty good person to loan money too. So good in fact that we pay an interest rate that borders on inflation level so really our interest is quite low. On top of that we have complete control of our own money so even if we got into trouble we could print our way out of it."

I read these Reddit posts, but they don't answer my questions 1, 2.

[ u/flyingjam ] No, it really doesn't matter, at least in the way you'd worry about personal debt. Firstly, the debt is not structured like the loans you take from a bank. Most of it is in Treasury Bonds. These are bought; you too can buy treasury bonds. As long as the debt grows at a similar rate to our GDP, it's not a problem. And so far our debt is well within acceptable limits. But too much debt isn't necessarily good either; for one, it can cause runaway inflation like Venezuela.

[ u/Holy_City ] Debt isn't inherently bad. If you have debt and continue to make the payments on that debt, it gives others faith that when they loan you money you can pay it back, which lets you borrow more money. It's when the government can't afford to make payments that it becomes a major problem. That's what happened to Argentina earlier this year. Here's a decent, concise article describing the situation

[ u/flashfyr3 ] We don't have to ever pay off all the debt. We have to pay the interest on it or risk market failings, but not pay it off. Assuming the country doesn't collapse, the debt can ride essentially indefinitely. If the country DOES collapse, the debt is essentially irrelevant. The average family can't just decide to increase its income. The government could. Raising taxes to pay off the debt is an unfortunate but ultimately necessary action.

  • 1
    The only way a question like this can be answered is if we can find a situation with which to compare, but I don't think one exists. Recent sovereign debt crises have had either economies that are in no way comparable to the US (eg Argentina) or have no control of their monetary policy (eg Greece). Also, one needs to consider how much the Treasury would lose (lost tax revenue, increased social security) by not spending this money, which I'm not sure is knowable at the moment. – Joe C May 9 at 8:29
  • 1
    Japan is famously over 200%. There are various arguments as to why the structure of their debt is peculiar and that couldn't happen as easily in other countries but it's at least evidence that all hell does not break lose if you go over 90%. Beyond that, it's possible that thinking of it in terms of a fixed threshold is just not that useful. – Relaxed May 9 at 10:45
  • This is similar to an econ SE question economics.stackexchange.com/questions/34634/… Alas this P.SE q is even broader, mixing in the debt ceiling, which is probably not the main constraint here, so this q is also misguided in some ways... – Fizz May 9 at 12:41
  • And if you want a glib answer to your general debt-ceiling q: as much as the electorate would accept, in terms of future inflation (because that cuts down gov't debt, in real terms): politics.stackexchange.com/a/52952/18373 – Fizz May 9 at 12:56
  • While we don't know when things will break, we do know that money borrowed results in interest payments that need to be made. Once you get to a high enough debt load, servicing the debt is a chunk of your budget. Covid probably justifies the expenditure, right now. Years and years of not balancing the budget for political expediency (easier to cut taxes than to raise them or cut services), less so. – Italian Philosophers 4 Monica May 9 at 15:33

The answer is probably unknowable in advance. I suspect debt may be immediately and objectively limited by the market for US Treasury bonds (see point 6 of the question). I don't think anyone knows at what point these investors will start to think enough is enough and look for somewhere else to put their money, or at what point the US would start to have trouble borrowing and/or experience unacceptable inflation.

According to so-called Modern Monetary Theory (or MMT), the US should feel free to spend, while keeping an eye on inflation; as long as there is no signs of major inflation, keep going. This aggressively pro-spending view is not necessarily mainstream economics but it has been gaining wider political acceptance in recent years. I don't think MMT supporters claim to know where the limit lies, it seems to be a more try-and-see approach.

As mentioned in the comments, Japan's GDP-to-debt ratio is more than double that of the United States. If we put aside the question of what GDP will do and assume that the US could double its current debt of about $22 trillion...well, that's a whole lot of money.

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  • thanks. i removed two sentences that felt superfluous. – Swansea May 9 at 21:12

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