Friday, March 17, 2006

Debt Limit Raised

The Senate voted to raise the federal debt limit to $8.97 trillion. This new massive debt limit is all of 70% of current GDP. Even 70% debt to GDP is small compared to other countries, but by the time we reach the new debt limit our GDP will be much higher and our debt ratio smaller.

To conceptualize our debt, $8.2 trillion is the total amount of treasury securities that are demanded at current interest rates (about 4.6%). $4.7 trillion of that is all voluntarily held by the public, the rest is held by our own government. $9 trillion is about 16 days of trading volume in the treasury market, which has a total daily trading volume of over $500 billion.

Without our current national debt there would be trillions of dollars of demand for risk free securities that would not be met. It is inconceivable that the demand for treasury bonds would ever vanish in the future. Treasury bonds are one of the few things that only the government can supply. But it seems that treasury bonds are the only thing that some people don't want the government to provide.