The Great Debt Scare

My comment to Robert Reich's Blog about "The Great Debt Scare: Why Has It Returned?"

As I am sure you know, GDP is a flow measure and not a stock measure like debt. As far as I know, there are no good stock measures of intertemporal GDP. However, a possible explanation of the increasing yield on longer-term treasuries, besides expected inflation and the inflation risk premium, is a decline in the expected value of future multi-period GDP. Investors themselves may internalize and verbalize the decline in the multi-period expected GDP as higher yields and concerns about debt levels. Concerns about US debt levels may be concerns about future GDP growth and about the Government's ability to capture a sufficient percentage of future GDP through taxes and fees to stay current on existing and future debt levels. Without a GDP stock measure, we must rely on models, which may be missing important signals that the market is incorporating into its expectations of future GDP. The market may be rationally concerned about debt levels. A stock level accelerates future period concerns into the present. Concerns about long-term debt reflect concerns that the bonds may face during their entire term to maturity, such as the last 15 years of a 30-year bond, as much as concerns about the current and early years of debt service. The market may see things that the current modeling does not incorporate. Even if one substitutes the total value of non-governmental equity and debt as a proxy for a GDP stock measure, the recent periods have shown a significant value decline in the total value of equity and debt, far in excess of the percentage decline in recent GDP. The decline in total investment value may reflect a market expectation of an equivalent amount of future declines in GDP, corporate cashflows, dividends and profits. In this scenario, taxes would also decline substantially and the government may not have the ability to service high debt levels.