Review article
https://doi.org/https://doi.org/10.46672/aet.10.2.5
SUSTAINABILITY OF US NATIONAL DEBT BASED ON KRUGMAN‘S THEORY OF DEBT OVERHANG
Domagoj Ćorić
; Institut za sigurnosne i obrambene studije
Abstract
The paper addresses the issue of increasing the U.S. national debt, which reached alarming levels in 2023, pushing it to the forefront of the public narrative. The focus of the academic
economic narrative around debt issues is generally discussed within the context of Republican and Democratic economic ideologies. This paper specifically argues that the main factor in debt
sustainability lies in how it is perceived by banks and creditors. Furthermore, the paper hypothesizes that debt sustainability depends on the amount of debt, its interest rate, and its value in the secondary market. Superiority of such factors is demonstrated through the theory of Krugman’s debt overhang, based on actual data from the last two quarters of 2023. The paper empirically shows that the U.S. is currently in a state of debt overhang without uncertainty regarding the debt amount and existing interest rates. According to Krugman’s theoretical concept of the Debt Laffer Curve, it is also concluded that the U.S. debt is not on the regressive side of the graph. The paper concludes that, based on current trends, the U.S. are capable of attracting new liquidity to service previous claims. Based on existing 2023 data, the paper generates hypothetical values for the first two quarters of 2024 and empirically demonstrates
what levels of increases in debt and interest rate (and debt price decline) can be expected to push the U.S. into a state of debt overhang with uncertainty. In the end, the paper concludes that, given current trends, U.S. debt is in a state of overhang without uncertainty, but it also presents the negative consequences that would affect both the U.S. and global economies if the U.S. entered a state of debt overhang with uncertainty even for a brief period.
Keywords
U.S. debt, Paul Krugman, Theory of Debt Overhang, Debt Laffer Curve, External Debt Sustainability
Hrčak ID:
324877
URI
Publication date:
23.12.2024.
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