Sustainable Debt

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How can policy makers know if they are pushing the debt to GDP ratio trend in the desired direction? What are the guidelines for discretionary monetary policy? The “Ph. D. Standard” (PDS) is the current guide for Fed monetary policy.

Key PSD factors

Borrowing Costs (B)

Real Output (R)

Inflation (I)

Taxes (T)

Spending (S)

(R+I) is the nominal gross domestic product (NGDP).

(T-S) is the primary deficit.

US deficits are sustainable if economic output minus interest expense is greater than the primary deficit.

(R+I) – B > |T-S|

US deficits are not sustainable if economic output minus interest expense is smaller than the primary deficit.

(R+I) – B < |T-S|

An ideal situation for the Fed consists of 4 percent real growth, 1 percent inflation, 2 percent borrowing costs as a percentage of GDP, and 2 percent primary deficit as a percentage of GDP.

(4+1) – 2 > 2

3 > 2

This is a sustainable condition.

The current situation for the Fed is not sustainable.

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