Research by economists Carmen Reinhart and Kenneth Rogoff suggests that once a developed nation’s debt crosses 90% of annual economic output that annual economic growth tends to be about one percentage point lower.
Putting aside the fact that Rogoff and Reinhart are talking about a massive aggregated statistic, annual economic output, which is in reality impossible to calculate, there is something intuitively appealing about the Reinhart-Rogoff Line.
If a nation has debt equal to or greater than 90% of annual economic growth, it is a clear signal that the government is playing a large role in that nation's economy. This is always about moving assets away from the productive private sector and putting them in the bureaucratic sector, which is always a negative to annual economic output.
If such a trend continues, it will mean a serious decline in output. By the time, a country has debt equal to 90% of annual economic output, you know the impact is going to start to really hurt. Prior to crossing the Reinhart-Rogoff Line, government debt will still be suffocating to the economy but it may come in the form of projects not started and minor inconveniences, when you cross the Reinhart-Rogoff Line the debt, at some point, is going to start having a very noticeable impact on the standard of living.
Put another way, a Tea Party movement doesn't get started and gain momentum when a nation's debt is far from crossing the Reinhart-Rogoff Line.
Where does the U.S. government debt stand in relation to the 90% Reinhart-Rogoff Line? 88% The U.S. will probably cross the line some time this year. As of Friday, total national debt – the sum of all outstanding IOUs issued by the U.S. Treasury – stood at just over $13 trillion, or almost 90% of our projected GDP for 2010.
If a double-dip recession brings in GDP below projections, the U.S. debt will have crossed the Reinhart-Rogoff Line and be far into danger territory.