Milken Institute Review 2Q10 Page 26

The Milken Institute Review

when will the crisis occur?
It would be nice to pinpoint a date when our
fiscal policy is slated to pass from reckless and
irresponsible to crippling and irreparable.
But there is no magic threshold. It depends
on the era and doubtless other factors, in-
cluding the attitudes of the big creditors.

That said, nearly one-fifth of countries

that have defaulted or required debt restruc-
turing had external debt of less than 40 per-
cent of GNP, and more than half of countries
experiencing debt crises had debt levels below
60 percent of GNP. Thus, 60 percent might be
viewed as a rough threshold.

It's true that the United States amassed a

debt of 109 percent of GDP by the end of

World War II, which we were able to pay

down fairly quickly and without great trauma.

However, the process was helped along by an

enormous peace dividend: Simply removing
millions of soldiers from the federal payroll
and slashing spending for war materials cre-
ated fiscal surpluses. Moreover, the fiscal re-
trenchment had a relatively modest impact
on aggregate demand because the end of war-
time rationing led to an explosion of private
spending on houses, cars and the like. Even so,
there was a recession in 1946, which was
probably precipitated by the sudden cut in
government spending.

In contrast, the next time our debt hits 100

percent 2023 by CBO's projections the
government will be spending 23 percent
more than it takes in before counting interest.

c ata s t r o p h e