The blog post raises some fair points, but the author does a pretty poor job at getting any point across. The most concerning things right now are: low interest rates on very high risk debt, continued and dramatic growth of derivatives (you fail, I fail, we all fail), and China's decision to push the 2008 correction in to the future finally running out of steam. The geo-political issues in the Middle East, North Africa, and Asia are a whole other cause for concern.

I think the risks now are still fairly benign compared to what was faced during the Cold War (though we still build new nuclear weapons and delivery vehicles, Russia fell short of its recent goal of 300 and instead has built 30 so far.)

[[Citation needed]]

2013 A = Debt is around: $17.5 trillion B = Debt Service: $416 billion C = Average Rate: 2.38% ($416 billion / $17.5 trillion) D = U.S. Tax Revenue: +/- $2.8 Trillion

Things won't get interesting until B approaches D.

So one way of looking at is if everything remained constant (which it won't) you'd need 15% interest rates on the current debt for debt service to approach tax revenue. If interest rates stay the same you could increase the debt to $128 trillion.

Reference: Debt: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Debt Service: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Tax Revenue: http://www.usgovernmentrevenue.com/

I'd say things would get pretty interesting well before that point. B=D is just the point at which a default is inevitable (unless much higher tax revenue is achievable without causing other problems).

But the problem is that the interest rates are so low now that large increases are not outlandish. 7 years ago, the rate was more than double what it is now. Looking at the graph in the article, in the 80's it was over 10%, more than 4X the current rate (which would imply 1.6 trillion in debt service).

It seems like we're making a big bet that interest rates are down permanently. That may be true, but it seems like a fragile assumption to me.

In reality, B=D is likely to balance itself out again. This becomes apparent once you think through where the interest payments go.

If they are reinvested in government bonds, nothing happens. If they are reinvested in other financial assets, the general interest rate decreases, which will also pull down the interest rate on government bonds (reducing B). And if the interest payments end up with people who spend them on goods, well, that grows the economy, which increases D.

http://research.stlouisfed.org/fred2/series/FYOIGDA188S

And we shouldn't be surprised if rates go up substantially, because they are at historic lows right now.

If market participants demand a higher interest rate, I wouldn't call that a "complete 180".

Regardless, change is the only constant, as they say. Markets move. Behavior changes in response to the environment. If we really are supposed to be a risk-free place to loan money, then I would think we'd be a little more resilient to rising interest rates, which happen fairly often historically.

Basically, any scenario in which interest rates grow are scenarios in which automatic stabilizers will reduce the government deficit in other places. It's a healthy system in which the feedback mechanism go in the right (i.e. stabilizing) direction.

It's not that hard to imagine; what you describe is essentially Stagflation. You may consider it unlikely, but there are some known potential causes[1].

As I understand it, Stagflation happens when increased demand is less able to stimulate increased supply than one might expect.

As mentioned in [1], an oil supply shock could be a cause. That is not outlandish given the current instability in the middle east and our tense relationship with other oil producers (Russia and Venezuela). The US and Canada do produce a lot of oil, which may offer insulation, but I don't think that's necessarily a defense.

Another cause listed is tough regulatory atmosphere. For instance, if the EPA decides to strongly curb CO2 emissions, or misguided labor laws come into effect, or the healthcare system in the US gets even worse. Again, not outlandish.

[1] http://en.wikipedia.org/wiki/Stagflation

EDIT: reworded for clarity

First: In the stagflation of the 1970s (which is really the only significant empirical data point we can draw from), increased interest rates were a political choice made by the central bank rather than an economic necessity.

Second, and more importantly: Stagflation is characterized by inflation, which means that nominal GDP grows even while real GDP is stagnating.

Since real GDP is irrelevant to the debt-to-GDP ratio (witness the debt-to-GDP ratio through the 1970s), the conclusions for whether one should worry about the debt-to-GDP ratio remains the same as far as I can tell.

We're fragile because ( IMO ) we're running the money supply too lean - especially for people who are in the grey market economy.