Imperial falls are associated with fiscal crises, Niall Ferguson reminds us — sharp imbalances between revenues and expenditures, and the mounting cost of servicing a mountain of public debt:
Think of Spain in the 17th century: already by 1543 nearly two-thirds of ordinary revenue was going on interest on the juros, the loans by which the Habsburg monarchy financed itself.
Or think of France in the 18th century: between 1751 and 1788, the eve of Revolution, interest and amortisation payments rose from just over a quarter of tax revenue to 62 per cent.
Finally, consider Britain in the 20th century. Its real problems came after 1945, when a substantial proportion of its now immense debt burden was in foreign hands. Of the pound stg. 21 billion national debt at the end of the war, about pound stg. 3.4bn was owed to foreign creditors, equivalent to about a third of gross domestic product.
Alarm bells should therefore be ringing very loudly indeed in Washington, as the US contemplates a deficit for 2010 of more than $US1.47 trillion ($1.64 trillion), about 10 per cent of GDP, for the second year running. Since 2001, in the space of just 10 years, the federal debt in public hands has doubled as a share of GDP from 32 per cent to a projected 66 per cent next year. According to the Congressional Budget Office’s latest projections, the debt could rise above 90 per cent of GDP by 2020 and reach 146 per cent by 2030 and 344 per cent by 2050.
These sums may sound fantastic. But what is even more terrifying is to consider what ongoing deficit finance could mean for the burden of interest payments as a share of federal revenues.
The CBO projects net interest payments rising from 9 per cent of revenue to 20 per cent in 2020, 36 per cent in 2030, 58 per cent in 2040 and 85 per cent in 2050. As Larry Kotlikoff recently pointed out in the Financial Times, by any meaningful measure, the fiscal position of the US is at present worse than that of Greece.
[...]
Quietly, discreetly, the Chinese are reducing their exposure to US Treasuries. Perhaps they have noticed what the rest of the world’s investors pretend not to see: that the US is on a completely unsustainable fiscal course, with no apparent political means of self-correcting.
(Hat tip to Patri Friedman.)