The political drama for raising the US debt ceiling continues in Washington D.C.
The White House says the limit must be raised by August 2nd to prevent a US government default.
Economists warn that if it happens...Americans will see an instant spike in interest rates on everything from mortgages to credit cards, and it could send the dollar plummeting.
While economists agree on the dangers of a government default, their views differ over the threat of rising debt levels.
Debt's deep roots
Anthropologist David Graeber is not worried about the US's debt situation. In his new book, Debt: The First 5,000 Years he's traced the history of debt back to ancient Mesopotamia.
"Money at that time really meant credit," Graeber tells Guy Raz, host of weekends on All Things Considered.
"We think of virtual money as this kind of brave new world that's just happening now, actually it is the original form of money and it has been the predominant form of money for most of history."
In this period of virtual money, people were continually racking up debt — and like today, that was a problem. Graeber describes how as people would fall into debt their property would be taken away.
"People would just start running away and joining nomadic bands and periodically kings would declare debt cancellations."
That's right. New kings would come in and wipe the slate clean, but not very often. So for a long time it was individuals who were going into debt — actual countries didn't take on debt like they do today until much later.
"The real beginnings of the modern money system seems to go back to the Bank of England in 1694, Graeber explains. "A bunch of London merchants made a 1.2 million pound loan to the king to conduct to conduct some war, the king thereby granted them the right to take the money that he then owed them, that 1.2 million, and loan it to other people in the form of bank notes."
So British currency, Graeber says, is simply British debt.
"If the king ever paid back the debt, there would be no money."
Graeber argues that the US Federal Reserve is based on a similar system as the Bank of England and points out that America has always had a debt.
"The only persion who tried to pay it down, and also eliminate the Central Bank (...) was Andrew Jackson, and it seems that that's what led to the panic of 1836 and it led to catastrophic consequences."
A dangerous debt threshold?
While debt is a useful economic tool, says economist Kenneth Rogoff, it can be dangerous.
Debt can be explosive when it reaches a certain level. Last year Rogoff and his colleague Carmen Reinhart, senior fellow at the Peterson Institute for International Economics, went through the financial data of 44 countries over the past 200 years and found that when government debt exceeds 90 percent of GDP countries suffer slower growth.
Currently, the US debt is above 98% of its GDP.
"There's no hard a fast rule but 90% [of debt being GDP] seems to be a useful threshold," according to Ken Rogoff, a professor of economics at Harvard University and co-author of the book, This Time is Different: Eight Centuries of Financial Folly.
What makes exceeding that 90% mark worrisome, explains Rogoff, is that economic growth starts to slow down by 1%. Some economists, including Paul Krugman, say the way speed up that growth is to take advantage of today's low interest rates. The idea being if a country spends and invests more, they'll be able to make more in the long run.
But Rogoff isn't enthusiastic about that tactic.
"Interest rates can change like the weather; they change very suddenly," he says, "You can't get your debt levels down suddenly."
To Rogoff, quickly injecting more money into an ailing economy isn't a long term solution.
He believes the US's current situation has been misdiagnosed as a post-war recession. Rogoff sees it more as a post-financial crisis recession, which requires a different approach.
Rather than pushing for fiscal stimulus, which would involve injecting money directly into the economy, he would like to see the Federal Reserve promote inflation, for example by buying treasury bonds.
"Frankly this is a once in 75 or 100 year situation when having a bit of extra inflation would be just what the doctor ordered," he says.
The only problem, Rogoff says, is that politicians are unwilling to even consider the idea of inducing inflation.