When is debt too high?

For individuals and companies, debt is too high when it can no longer be serviced. For governments and nations the story gets a little more interesting.

New debt adds to economic activity

Almost all governments are in deficit so government debt goes to spending adding to economic activity.

Private debt results in transaction fees, some additional consumption and asset purchases. Debt that creates new assets adds directly to economic activity and debt to purchase established assets results in a chain of transactions. This chain of transactions is where a seller sells an asset and uses the proceeds to purchase other assets, pay transaction fees, taxes and some consumption (money in pocket effect). The chain of transactions repeat contributing diminishing amounts to GDP as the capital is reduced through fees & taxes. As the new debt is created, economic activity increases and more debt is needed in future years to maintain the additional economic activity.

Interest on old debt increasingly drags on GDP

The benefit of new debt is felt initially and diminishes thereafter however the servicing costs remain throughout the life of the debt. Obviously new debt needs to increase to provide benefit that outweighs the drag of servicing the old debt. Even simple modelling shows that once in an increasing debt cycle that to maintain economic activity requires an exponential growth in the total debt.

There are limits on national debt

One limit is when the total debt cannot be serviced without addition of new debt. Past this milestone, debt will need to be exponentially increasing and will do so until loss of creditor faith. Even with nations that can print their own currency to service debt, doing so would only accelerate distrust from creditors. There may be lower limits on debt depending on specific circumstances, however once a runaway, the debt train can only crash with severe austerity or defaults.