June 19, 2023 — After an interval when little attention was paid to the long-run prognosis for government debt, its sustainability is again front-and-center in the United States, as in many other countries.  The reason is not the concocted debt ceiling crisis, which was resolved at the end of May, two days before a looming default. A likely reason is, rather, the big increase in interest rates over the last year.

So long as interest rates, both nominal and real, were historically low — even close to zero in 2021 — it seemed fine for the government to borrow.  In particular, short-term real interest rates, that is, nominal interest rates minus expected inflation, were negative.  But now that interest payments on the national debt have risen, with more to come, the situation doesn’t look so benign. read more