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National Debts Can Threaten Economic Growth

National Debts Can Threaten Economic Growth
National Debts Can Threaten Economic Growth

Efforts to slash national debts are at the heart of fierce debates in United States and protests in other nations. In some cases, these government debts are bigger than the entire economic output of the nation for a year. Debt problems can slow economic growth, raise interest rates and make financial problems worse.

To get an idea just how large a nation's debts are, economists compare the size of the debt with the size of the nation's economic output.

Economist Till Schreiber says too big a debt burden can hurt the economy.

"There is some research by economists that on average across all different countries - rich and poor and medium income countries - 90 percent debt-to-GDP ratios suggest a slowdown in growth," said Schreiber.

Schreiber teaches at the College of William and Mary in Virginia. He says nations with strong industries and domestic savings, like Japan, can bear far larger debt burdens than other countries, like Portugal, which has lost many of its industries and jobs to foreign competition.

Lenders express their confidence in Japan's economy by offering loans to Tokyo at relatively low interest rates, while Portugal has to pay a high rate, called a "risk premium."

La Salle University Finance Professor Walt Schubert says investors and lenders set interest rates by looking closely at a nation's economy.

"The ability to pay [repay loans] is the ultimate issue," said Schubert. "What investors are worried about is what is going to happen to your debt and what is going to happen to your GDP."

Although experts have no doubt about the ability of the United States to repay its loans, major credit rating agencies warn that they might downgrade America's credit rating unless Washington resolves the political impasse between President Barack Obama and Republicans in Congress.

Some experts say a downgrade of America's AAA credit rating is a strong possibility, even if Congress and the President manage to work out a deal before August 2 - the date the United States is expected to reach its debt ceiling and default on its financial obligations.

A lower credit rating would bring higher interest rates on the $14.3 trillion U.S. debt, which is nearly as much as the value of all of the goods and services produced in the United States in a year. The U.S. debt is so large that even a small interest rate increase would cost billions of dollars.

American Enterprise Institute scholar Kevin Hassett says a debt rating change could set off a downward economic spiral for the United States.

"As your rating goes down a little, the interest rate goes up a little, and then you have got to make more interest payments and so your deficit gets larger," said Hassett. "And the larger deficit makes the rating agency a little more nervous and so they lower your rating again. And then you end up in kind of a death spiral."

Hassett says the U.S. government takes in about $185 billion a month from taxes and other sources, but pays out about $300 billion a month, which he calls unsustainable.