Together, these considerations suggest that we might want to look at the national debt from a different perspective. In particular, it seems more accurate to view the national debt less as form of debt and more as a form of money in circulation.
There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or inflation rate) and a given structure of interest rates. However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there.
Debt-to-GDP Losing Respectability?
My feeling is that we are seeing a split in fiscal analytical tendencies within what I term conventional analysis. (The "conventional wisdom" which includes both mainstream academics, as well as the more eclectic views of financial market participants.)
- Those with strong free market views will probably stick with conventional debt-to-GDP ratios, since they are so easy to scare people with. This has been the go-to tactic for decades, and I see no reason to for them to change at this point.
- Otherwise, there are obvious issues with the debt-to-GDP ratio as a metric, and so there needs to be a new focus of discussion. Since embracing Functional Finance is apparently a step too far, the path of least resistance is discussing interest service metrics.