Above chart is US federal deficit / GDP ratio, 1900-2010. The two prior peaks (1919=17, 1943=28) coincided with WWI and WWII respectively. Currently we are at the 10.64; 3rd highest in the 110 year series, and not declining yet.

The rational will argue the deficits financed the first and second efforts to forever free the world from tyranny. Recalling that financial markets are forward looking, that the options market forecast the 9/11 event [A. Poteshman: Unusual option market activity and the terrorist attacks of September 11, 2001, Journal of Business , 2006] among many other things , one wonders when flags may wave again?

Alex Castaldo adds:

Some cheerful reading from the Congressional Budget Office :

Further increases in federal debt relative to the nation’s output (gross domestic product, or GDP) almost certainly lie ahead if current policies remain in place. The aging of the population and rising costs for health care will push federal spending, measured as a percentage of GDP, well above the levels experienced in recent decades. Unless policymakers restrain the growth of spending, increase revenues significantly as a share of GDP, or adopt some combination of those two approaches, growing budget deficits will cause debt to rise to unsupportable levels. […]

If the payment of interest on the extra debt was financed by imposing higher marginal tax rates, those rates would discourage work and saving and further reduce output. […]

[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. [If this were to occur, to] restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.


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