Is there a golden rule to how much debt a government can have?

Cohete Rojo · Jul 21, 2011

I read a periodical article quite recently that attempted to explain and justify the American United States' current debt level as acceptable because it was about even in magnitude with the GDP. So I had to wonder: is that anything special? The American States have a bank that buys US securities from the Treasury which then in turn loans out the money to larger banks who loan it out to smaller banks and so on, and this is said to be how the money supply is controlled. What explaination can be given that too much is too much?

I never read about a great man in the sky coming down and saying "here are the golden rules of debt", nor have I heard that there is some sort of universal money constant that can explain. So I figure that there must be something else to it.

I think everytime a politician goes on tv or through some media and states they intend to cut Social Security, Medicare or Medicaid the politicians wants to sends all the old and retired into a frenzy. That way they write letters to their congressmen stating how awful and idea this is and that they need the welfare because they have no other source of income.

jo mama · Jul 21, 2011

the answer to your question depends on whether or not we have a republican or a democratic president.

when republicans like bush spent more than all previous presidents combined in 3.5 years debt was great! dick cheney even said "deficits dont matter".

but for some reason, sometime around january 2009 the very people who supported george bush and his liberal spending policies suddenly became very concerned about debt and spending. for the life of me, i cant figure out exactly why they changed their tune when they did.

Rocketman1981 · Jul 21, 2011

Some top minds suggest that 90% Debt to GDP ratio cuts GDP Growth by 1% a year.

European rules for annual deficits were limited to 3 or 5% of GDP annually and countries like Greece were just making up the numbers when their actual deficits were 15%+ annually.

No accountability.

Warren Buffett suggested no congressman can be re-elected if the deficits are beyond 3%, then it'll get done every year!

Northside Storm · Jul 21, 2011

I'd say a healthy debt-to-GDP ratio is about 40%-50%. The United States has a debt of 15 trillion according to http://www.usgovernmentspending.com/federal_debt_chart.html which might be biased, but hey...

and GDP was about 14.7 trillion in nominal terms in 2010.

such that the debt-to-GDP ratio is somewhere slightly below or above 100%, depending on this year's GDP figures.

At around 100%, you're getting to the point where interest payments are a pretty severe drag on growth, government debt starts crowding out business debt, and people start wondering whether or not the government will pay---we're at this point with America.

There's no golden rule per say though. The Keynesian rule was always to try to have deficits or debt that would be outstripped by GDP growth, which isn't really happening with America or Europe or Japan. Failing that, I suppose an arbitrary number like 50% would work. I guess the answer to your question is that the golden rule of debt should be that government should only take on more debt if the benefit of doing so outweighs the cost, and that's a judgment call that varies from nation to nation. I'd put an arbitrary value of 50% to simplify things. Past 100% is where you start to see some pretty big problems.

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Is there a golden rule to how much debt a government can have?

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