M/s Modigliani and Miller advocated some debt in a capital structure. Seems the US of A has taken the theory a wee bit too seriously. I suspect they forgot that the M&M theory holds in an ideal world, devoid of taxes, assymetric information, bankruptcy costs, and the presence of an ethereal efficient market. All of which are completely at odds with the reality.
The US has worked itself into a hole and has managed to stay afloat by standing on a growing mountain of debt. Will the Dollar continue to be the Big Daddy currency of the world a decade down the line?
In an insightful paper, the Reinhardt-Rogoff duo document the existence of a strong link between banking crises and sovereign defaults across the economic history of many countries. In a finding that would make Hyman Minsky smile in his grave, the duo find that debt surges are recurring antecedents to banking crises, where often governments join in the party. Borrowing accelerates and hidden debts pile up. A banking crisis results…and is often accompanied by sovereign debt defaults. The government piles in and then bails out.
Seems the US has got most of the steps right. A debt default remains. But is highly unlikely. No, the US is not doomed yet. Or in the near term. But this continuously reflexive process of borrowing against an assetless future will have to end somewhere. Grandma austerity stories of saving more than spending will be back in vogue. That big debt-filled waistline (and the head) need some toning down! It strikes me a little amusing to see a nation eye-deep in debt schooling others on austerity!