And so it goes

The spreadsheet error heard 'round the world has spawned a cottage industry in hand-wringing. Not that any of this would actually, you know, change anyone's policies. But it is fun to mock the more-ignorant-than-you, as Ireland, Greece, et al. will be under death-spiral austerity for some time to come. The premise is wrong, but the debate seems to be between which conclusion from the incorrect premise is better. Is 90% debt-to-GDP sustainable, or is it 110%? How many angels can dance on the head of that pin?

If people were honest, they'd note the obvious. Debt-to-GDP is relevant when a country becomes reliant on the confidence of external creditors to sustain borrowing. This instance, from historical observation, is only applicable to developing nations. If the external creditors find reason to believe that existing loans might not be repaid, interest rates rise and new loans prove difficult to acquire. This causes the country's economy to stagger and fall, and due to the vicious cycle of recession leads to unemployment which leads to lower income tax revenue which leads to bigger budget problems which leads to less confidence in the ability to repay which... lather, rinse, repeat.

Debt-to-GDP is also an issue with those on fixed exchange rate regimes (gold standard, circa 1920) or common currency areas, where monetary and fiscal policy autonomy has been ceded to the central, external monetary authority. In this case, the country is physically restrained from borrowing by the central authority, which causes the same vicious cycle outlined above.

And then there are countries like the U.S. and Japan, which are not reliant on external financing and can for the time being monetize any realistic amount of debt. In this case, the percentage becomes meaningless. Does it matter that Japan owes 220% of GDP when 95% is owed to itself? Or that the U.S. biggest creditors are the Federal Reserve and Social Security? This sorta blows out of the water this presumed linear relationship between GDP and debt. Maybe the problem wasn't that the parameters weren't right but someone forgot to run a freaking Chow test? How many structural breaks can fit on the head of a pin, or a data series with so many quarterly, serial-correlated observations?

So the hand-wringers will wring their hands, and the Fed will be criticized for "not doing more" with an unemployment rate still in the 1991 recession range, and the central banks will continue to dictate the same policies because the alternative is Financial Armageddon, or something. Economics is the story rich people want to hear. And the rich run things. So nobody really listens.