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Debt Denial

The US Federal Debt now stands at $10.8 trillion. Seems like a lot, right? Government apologists would be quick to point out that this $10.8 trillion is still “only” 77% of US GDP. I’d like to make several points.

  1. If this is a relevant metric, how does the US compare to the rest of the world? Um, we do pretty badly. How come I hear all the time that the US education system is losing ground, or that the US health care system is inefficient, and then we hear nothing about how US fiscal responsibility compares with other nations? Why, because our record (if you believe in this metric) is worse than nearly every industrialized nation in the world aside from Greece, Italy, Japan and Belgium. The OECD average debt to GDP ratio is half of what the US is.
  2. Extrapolating current growth rates in debt-to-GDP would very rapidly put almost every industrialized nation on the verge of having their sovereign debt be rated as junk-bonds. You think a recession is bad, wait until you see what happens if the US defaults on its obligations. Do a little reading on Latin America in the 1980s for a glimpse, or Mexico in the 1990s.
  3. When we add in the new debt that will be issued from the current “stimulus” bill, that will push us well over the 80% mark (sort of like a gambler saying, “well, I’m already down $10,000k, what’s the big deal if I lose $500 more?”).
  4. These figures ignore the fact that the US is facing something on the order of $50 trillion of unfunded liabilities right now. The reason that they are not capitalized on the books (aside from the obvious political fraud being perpetrated) is that they are not 100% guaranteed entitlements (Socialist Security and Mediscare) – but in a world where Americans are clamoring for “free” national health care, is it anywhere near the realm of possibility that these commitments will be reneged upon? Even taking a conservative approach and saving the liability is $25 trillion, brings the nominal debt level to over $35 trillion. Or over 300% of GDP.
  5. But is debt-to-GDP the correct way to analyze the seriousness of a debt burden? I don’t believe so at all. Why? Because that debt is the sole responsibility of the federal government (I understand that “we” are them), but not one iota of that GDP is “produced” by the Federal Government. So using the federal debt and comparing it to the income generated by everyone else, is no different than me arguing that I am not indebted because the $300,000 I owe on my current mortgage is nothing compared to the income of my neighbor across the street (I think he makes well over $500,000). Supposing that I make $50,000, then the debt-to-GDP ratio on my block is $300k / $550k = 55%. Is that the relevant metric? Only if I can show up on my neighbor’s doorstep with a gun and force him to co-sign on my debt commitments … wait, that is exactly what Congress is doing – yesterday’s video clips notwithstanding.
  6. Even if you do not believe that the Congress is coercing us into the payment of its irresponsible debt run up, at best you might argue that their “revenues” in a given year are about $3 trillion. That is the federal take from the productive sector each year. Not even the most ardent socialists believe that if we had a 100% tax rate, that simply all of the private wealth would end up in the public sector. What is the maximum amount of revenue the Feds can raise in the US when GDP is $14 trillion? Well, I believe in equilibrium, so a good estimate would be about that $3 trillion. If they could raise more, they would. So a correct debt-ratio would be to compare the nominal debt to the “income” government has to pay it off each year. Either it is $10.8 trillion / $3 trillion, for a current ratio of over 300%, or it is $35 trillion / $3 trillion, for a ratio of over 1000%. Subprime anyone?
  7. Even on the current $11 trillion … suppose investors and foreign governments feared a US default, and that Treasury rates rose from their current levels (near zero) to a “not too high” 9% … debt service alone would account for $1 trillion per year in government expenditures, or 1/3 of the federal budget. Sound crazy? Well, the historical average Treasury Bill rate is 6.0%. So our present governmental borrowing costs seem to be unsustainably low (remember what gave rise to the subprime crisis in housing … we are headed for a subprime crisis in federal spending). Further, over 20% of the time since 1959 have Treasury rates exceeded 9%, and for a time were above 15%.

We are in debt up to our eyeballs. Usually I would not be worried because enough economic growth can solve lots of problems. However, given our anti-immigration sentiment, our prtotectionist sentiment, and our wise investment choices made by the government in the stimulus bill and beyond (see here and here for just two of the many examples), my outlook on growth is a lot less optimistic than it was in previous years. I hope I am wrong.

Note the basic government debt data can be found here.

4 Responses to “Debt Denial”

  1. Michael says:

    I heard all our debt obligations were 65.5 trillion the other day. But either way, I understand that WORLD GDP is only 45 trillion. I guess it’s time to consider buying gold.

  2. Ron says:

    It’s Not Our National Debt!
    Join the Washington National Debt Revolt – Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. The Campaign to Cancel the Washington National Debt By Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts

  3. Amitabha Mukhopadhyay says:

    I can say from my personal experience that the amount of debt is not important if the money is utilized in such a fashion that wealth is created in a very high proportion. I am continuously borrowing and paying back and a big chunk of the money is going for investments. As the months roll by I know that my overall debt is increasing at a high rate but then my investment is growing at a much higher rate. So as more and more time passes the investment will become ten times more than debt.
    Now there is a striking similarity between individuals and countries. So in case of America also the economy will ultimately attain such great height that all these debts will appear insignificant.

  4. jb says:

    To Amitabha: What is it, precisely that government is investing in that will continue or enhance productivity so as to outpace the growth of its debt? It is bleeding the private sector, which historically has been responsible for the prosperity we have enjoyed. Aside from investing in goods and services that provide for the common defense of our liberties, what exactly is it that government can do more effectively than the private sector?

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