“How Big Is Too Big?

“How much longer will foreign investors buy US debt?”

America has long borrowed without fear of a backlash, thanks to lenders’ lack of attractive alternatives. And it may for a while yet: much of the private sector either can’t borrow or doesn’t want to, and other countries also face yawning deficits, making them far from attractive. The national debt, at 38% of GDP, is well below its 1990s peak of 49%. But much of the deficit is still financed by foreigners, and global capital flows are now being rocked by the financial crisis. The next president will no doubt find deficits at 7% or more of GDP sobering enough. Without a plan for cutting that high figure back once the financial crisis and the recession pass—and with the inexorable climb in Medicare and Social Security costs as the baby-boomers retire now under way—investors may need to be compensated much more than they are now to keep on buying America’s debt.

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