Ep47 “Is the US National Debt Sustainable?” with Mohamed El-Erian
Sep 18, 2024
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Mohamed El-Erian, former CEO of PIMCO and chair of the president's Global Development Council, discusses the sustainability of the US national debt. He explores alternative measures of debt, beyond the debt-to-GDP ratio, and emphasizes historical context and investor confidence. El-Erian highlights the economic challenges posed by demographic shifts and the role of technological advancements like AI in shaping future growth. The conversation raises critical questions about inflation targets and the interplay of national debt with geopolitical stability.
Assessing the sustainability of the US national debt requires understanding various metrics beyond just the debt-to-GDP ratio.
Demographic shifts and technological advancements are critical factors influencing economic growth and the implications of rising national debt.
Deep dives
New Beginnings at the Lauder Institute
The Lauder Institute at the University of Pennsylvania has announced a new leadership appointment, with Jules van Binsbergen as the new director. The institute offers a unique joint degree program combining an MBA from the Wharton School with an MA in international studies, aimed at preparing students for roles as global business and political leaders. This partnership with the All Else Equal podcast highlights the relevance of finance and global management concepts to contemporary geopolitical and economic challenges. The discussion reflects a commitment to cultivating skills that meet the demands of today's world.
Analyzing National Debt Trends
The current national debt of the United States has reached an extraordinary $34 trillion, raising questions regarding its sustainability. A key point of discussion revolves around the debt-to-GDP ratio, which has climbed from just under 40% in 1975 to over 120% projected for 2024. Experts emphasize that using stock-to-flow measures, like national debt compared to GDP, may not provide a complete picture, as it juxtaposes a stock measure against a flow measure. Alternative ratios, such as comparing national debt to total assets, might yield different and potentially less alarming insights.
Interest Rates and Economic Context
Interest expense as a proportion of GDP offers another lens to assess the implications of rising debt levels. The analysis reveals that despite increasing debt, the total interest expense relative to GDP has remained stable over time, suggesting that external context matters. Notably, countries like Japan with high debt-to-GDP ratios can maintain low borrowing costs due to factors like low interest rates and distinct economic conditions. Evaluating these complexities showcases the need to consider both temporal and contextual factors when discussing debt sustainability.
Future Growth and Demographics
The interplay between demographics and economic growth is increasingly significant, particularly as many developed countries face population decline. While some experts remain optimistic about future growth drivers, including technological advancements and innovations in sectors like life sciences and sustainable energy, challenges persist. The current sociopolitical landscape, particularly concerning immigration, complicates these dynamics, potentially limiting the availability of labor for supporting growth. Therefore, addressing these demographic shifts alongside innovations is crucial for long-term economic viability and sustainability.
What is the best way to measure National Debt Sustainability, and how does the US do on those metrics compared to other countries? In the first episode of the new season, hosts and finance professors Jonathan Berk and Jules van Binsbergen speak with guest Mohamed El-Erian about the intricacies of the national debt, different measures of sustainability, and the implications of rising debt for national and global economies. Mohamed, Jonathan, and Jules also explore the broader macroeconomic and geopolitical factors at play. They discuss the importance of demographic shifts as well as recent technological advancements (AI) for economic growth and our fiscal future.
El-Erian is the former chair of President Obama's Global Development Council and former CEO of PIMCO. He is a Senior Fellow at the Lauder Institute.