So what does it mean to live beyond your means?

I ran across an interesting article in Handelsblatt (www.handelsblatt.de) today. A professor of history of economics was interviewed about the current financial crisis.
His key message was that the U.S. has been "living beyond its means" in the last years. He went on to explain that the U.S. were able to maintain their living standard even though many of the core industries are no longer competetive. This was made possible by placing government bonds in the international markets which were bought by American, Asian and European banks (among others).
It is true, the U.S. have accumulated a huge national debt. You can take a look at the number here:
http://www.oddhammer.com/tutorials/debt_clock/US_debt_clock_dynamic.swf.
According to wikipedia that's about $37,000 per capita.
http://en.wikipedia.org/wiki/United_States_public_debt
This does not include the new debt due to the financial bail-out package.
What was surprising to me is that Germany is actually not doing much better:
Germany has a debt of € 1.5 Trillion Euros, that's about € 18.000 per capita. At a current exchange rate of 1 Euro - U.S. $ 1.4 that's about $ 25,000 per capita.
That raises the question - when will it ever be paid back? Or take a step back and wonder: Will it ever be paid back? Or will we simply let inflation take care of it?
While it is true that inflation will lower the "value" of national debt, a good part of it is "inflation proof", meaning it adjusts for inflation.
There are several problems associated with national debt:
1. It limits the government's ability to function and direct the economy. Since much of the government's budget is used up for servicing debts, there is little left over for other things. In effect the government loses its ability to "govern" the economy. It ties its own hands.
2. In order to pay it off, the government has two options: Raise taxes or cut back on government services (reduce spending).
Taxes do a lot of things - they re-distribute wealth from the rich to the poor, make sure the country is safe and secure, etc. Therefore I do not agree with the widely held belief (especially in the U.S.) that taxes are inherently evil. Taxes at the right level are good and necessary for the government to do its job. And of course there will be a never-ending discussion, what the "right level" is. But from a macro-economic point of view, taxes tend to stifle economic activity. They hamper investment which would lead to new jobs. They reduce consumers disposable income thereby reducing the people's buying power. That in turn hurts business and may lead to a downward spiral of decreasing demand and decreasing supply.
Government services are important. After all, that is what we have a government for. Good roads, an efficient legal system, a well trained and well-equiped police force, welfare for the poor etc. are just some of the things that taxes make possible. And I think there is nothing wrong with that.
But back to national debt: There is another problem associated with national debt - apart from governments "tied hands": Countries pay a certain interest rate on their debt - this interest rate changes and depends on the country's economic power. In effect, investors are receiving interest to offset the risk that they do not get their money back The greater the risk, the higher the interest.
National debt is not a "monolithic block" of debt. It consists of a host of government bonds with a certain interest and a maturity date. In order to pay back the bond when it matures, most governments issue new bonds. In effect it's robbing Peter to pay Paul.
If there is less money available in the market (e.g. because other countries are using up the available capital to finance their debt), or if the ratio between national debt and economic ability becomes unfavourable, the interest rate will rise. That means it may become increasingly more expensive to re-finance the national debt. This may lead to a vicious circle in which governments lose the ability to re-finance the debt.
A case in point is Argentina: http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002)
In essence, the higher the national debt and the weaker the economy, the more likey will a scenario like Argentina's default be.