What business model is there in the whole wide world where a company just keeps borrowing money and doesn't ever pay it back? What personal model? None. Fine, we all agree that a country has very good reasons for deficit spending. All well and good. But it is insanity to never pay it back.
Maggie,
You raise a good issue. Unlike with individuals, there is an underlying assumption that a state will exist forever. Hence, governments can expect to roll over their debt, paying off creditors (hopefully, on time and fully) while incurring new debt. A similar situation exists with companies, but their latitude is less than that for governments, as governments have taxing authority while companies depend on revenue (all from voluntary transactions). Having said that, there is a limit to how much debt relative to GDP that a government can incur before confidence in its ability to meet its obligations erodes. That limit (in technical parlance, its debt intolerance) varies from country to country. A country's debt intolerance largely depends on its past default history (extremely rare for the U.S.; arguably its shift from the gold standard during the Great Depression represented a partial default) and inflation experience (the U.S. has experienced a few major inflationary outbreaks, but those occurred after long intervals of quiescent inflation).
IMO, the U.S. is advancing toward a threshold where confidence in its ability to meet its obligations could begin to fade. Aside from the growing U.S. imbalances, there's also the growth of attractive alternatives for capital in rapidly growing economies. Not surprisingly, the IMF is also expressing growing concern about U.S. imbalances and its forthcoming
Fiscal Monitor (May 2011) will report that the U.S. needs to make a fiscal adjustment > 10% of GDP and that the present U.S. course would achieve an adjustment that is under 40% of what is required. That could change if the U.S. adopts a credible fiscal consolidation path in conjunction with raising its debt ceiling ahead of the report, as the IMF's reports tend to reflect even very recent information. As the U.S. is a money center nation, the global risks associated with a debt crisis in the U.S. would be enormous and, unlike the spillovers associated with Greece, Ireland, and possibly Portugal, the contagion would spread extremely rapidly.
Two things to watch for down the road if the U.S. does not move onto a credible medium-term fiscal consolidation path:
1. Trends in long-term Treasury yields where the interest rates are rising faster and to levels that cannot be justified by inflation and inflation expectations (a hint of a growing risk premium).
2. A shift in the debt structure toward shorter-term debt (an effort to reduce debt service costs but at the increased risk of a crisis, as excessive short-term debt is a better trigger for a crisis given the need to roll it over more quickly).
