Dan Thornton,[1] a former research economist at and vice president of the Federal Reserve Bank of St. Louis, recently wrote in the Wall Street Journal that “the issue isn’t whether the U.S. will repay its debt, but whether it can service the debt.”[2]

What does it mean to “service the debt”?  According to “Investopedia,” “Debt service is the cash that is required to cover the repayment of interest and principal on a debt for a particular period[3]..… [Individuals and] companies must meet debt service requirements for loans and bonds issued to the public. The ability to service debt is a factor when a company needs to raise additional capital to operate the business.”[4]    

This leads us to the Debt Service Coverage Ratio (DSCR): “the debt-service coverage ratio (DSCR) is a measurement of a firm’s available cash flow to pay current debt obligations. The DSCR shows investors whether a company has enough income to pay its debts.”[5]   

The DSCR is, of a course, an equation.  Debt Service Coverage Ratio = Net Operating Income divided by Total Debt Service. 

“Net operating income is a company’s revenue minus certain operating expenses.” 

“Total debt service refers to current debt obligations, meaning any interest, principal, sinking fund, and lease payments that are due in the coming year. On a balance sheet, this will include short-term debt and the current portion of long-term debt.” 

“Typically, a DSCR greater than 1 means the entity—whether an individual, company, or government—has sufficient income to pay its current debt obligations.” 

So, can the U.S. service its debt, regardless of trying to pay it all back?  Thornton says that the current interest cost of the debt is 1.5 percent of Gross Domestic Product (GDP).  This, he says, is only half of the peak of 3 percent in the post-1945 period.  The Federal Reserve Bank is now raising interest rates to break the current surge of inflation.  We’ve got quite a bit of space before hitting the previous peak of 3 percent.  Thornton says that “I doubt that investors or the public will lose faith in the government’s ability to service the debt at least until debt service exceeds 3 percent of GDP.” 

The United States Government is not quite the same thing as an individual or a private business.  In a pinch, it can take various actions.  It could cut spending.  The Big Three spending categories are Defense, Social Security, and Medicare/Medicaid.  Together, they amount to about 60 percent of federal outlays in a normal year.[6]  In a pinch, it can increase revenue by raising taxes on all or some Americans.  This would run against a well-established political trend in recent decades.  To raise taxes not in pursuit of new spending, but in favor of improving the credit-worthiness of the country seems chancy.  In a pinch, it could reduce the interest rate and perhaps extend the repayment period to cut payments to creditors by fiat.  IDK. 

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[1] On Thornton, see: https://www.linkedin.com/in/dan-thornton-9922a06a/ 

[2] Letters to the Editor, WSJ, 6 July 2022.

[3] Basically what I do when I make my mortgage payment. 

[4] https://www.investopedia.com/terms/d/debtservice.asp 

[5] https://www.investopedia.com/terms/d/dscr.asp 

[6] See: https://www.cbo.gov/publication/57170  However, 2020 was not a “normal” year.  There was something like $1.2 trillion in emergency spending on PPL, Recovery Rebates, and suddenly expanded Unemployment compensation.