I had a lot of fun researching and writing this piece: what if AI made the world’s economic growth explode?. The macroeconomics of an extraordinary thought experiment:.

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But as US politics get more populist, and as the necessary adjustment gets bigger, it becomes easier to imagine the US choosing especially inflation as a route out of debt. Therefore, the chances of a crisis are going up, which is driving long-term bond yields higher.

Investors I speak to are generally what I would call conditionally-relaxed about US debt: they think that rising bond yields would force Congress into whatever fiscal adjustment was necessary.

Like with so much in economics, what matters is the moment at which you lose credibility. Investors try to predict the future. When they doubt you will adjust, the risk premium on your bonds rises, and fears over your ability to pay your debts become self-fulfilling.

Another problem is that higher debt also both suppresses growth (by crowding out private investment) and raises interest rates (by stimulating the economy, and by worrying investors). So the longer you leave the adjustment, the worse are the conditions you face.

With an interest rate-growth gap of 1% you need a primary surplus of 1% of GDP. So total austerity worth 4% of annual GDP. And unlike when growth and interest rates cancel out, the necessary adjustments gets bigger the more you let debt rise.

So, with an interest rate of 4% and nominal growth of 4%, you need austerity (spending cuts or tax rises) of about 3% of annual GDP to stop debt-to-GDP from growing. But what if rates are higher or growth disappoints?.

Republicans' tax-cutting bill won't make this much worse, but it will (more or less) stop it improving. Current official forecasts assume that the 2017 Trump tax cuts expire.

Assume interest costs settle at 4%. Then interest and growth cancel out: the US only needs Primary Balance = 0 to stop debt-to-GDP from growing. Unfortunately, the primary balance in in deficit: it is about -3% of GDP.

US debt is now ~100% of GDP. It is reasonable to assume trend nominal economic growth of 4%. The US currently pays an average interest rate on debt of 3.4%, but that is rising as the US rolls over debt at today's higher bond yields.

To stabilise debt-to-GDP, you need:.Primary balance/GDP = (Interest rate - growth rate) * Debt/GDP.

The best way to think about this is: what primary balance (the deficit *before* interest costs) is needed to stop the debt-to-GDP ratio rising. The formula is simple, and depends crucially on the difference between the interest rate you pay and the economic growth you get.

Is the US heading for a fiscal crisis? This question is about politics as much as economics. It boils down to: do you think politicians will eventually implement austerity, rather than choosing default or inflation? What economics tells you is how much austerity is needed ⬇️.

RT @Wincottfound: Wincott winner @MatthieuFavas of @TheEconomist receives his award for Journalist of the Year today! .