America’s national debt is uberlarge; the world’s largest. Our national debt is larger than the economies of many countries.
Our national debt is not a theoretical boogieman that may/may not come to haunt us. The boogieman arrives in full regalia later this year (Oct 2010) when just over $2,000,000,000,000 (2T) is due in a balloon payout to those to whom we owe $$$.
Good News: our current national credit rating: ‘AAA’, as determined by the credit rating agency Standard & Poor’s (S&P).
A triple ‘AAA’ credit rating means that we have the ability to fully pay back what we have borrowed, if we really wanted to.
Bad News: we have become addicted to borrowing rather than living within our means. We are at risk of partial default and renegotiation of our debt at much higher rates if we do not immediately change our borrowing and spending habits.
National debt has a dollar value. The more important measurement is the debt as a percent of the total country’s production, or GDP ($14.4 trillion, 2008).
Our national debt is now 83% of GDP, up from 51% in 1988 (Source: U.S. Treasury, Bureau of Economic Analysis). If you include the debt projected by the Obama Administration for 2011 and 2012, we will probably exceed the 95% level by late 2011; translation: it would take $95 out of every $100 earned if we were to pay back the debt in a single year.
Usually our debt payments are spread over a 10 year period, but that still means that we must pay out the equivalent of 9.5% of our total economic output just to pay the ‘minimum amount due‘.
Chart: Our Borrowing Addiction Level
The Bush Administration tax cuts had two impacts: A) we lost our ability to pay our bills in full and became dependent upon foreign loans to run our government; and B) we went from paying down our debt and having a surplus of almost $1T. Our national debt doubled during the Bush years and the Obama Administration is on track to set impressive records, too.
- Democrats often create debt because they boost spending with the expectation that taxation of some in society will be sufficient to pay for goodies to all. Democratic spending is like a spotted dog where each spot has its own agenda and can cause the dog to scratch without end every itch.
- Republicans believe the Tax Cut Fairy will solve everything and as a result create just as much or more debt. They love to talk about the Laffer Curve, but forget that it has two predictive ends: tax too much and revenue drops, tax too little and you incur debt via borrowing because you still must pay your bills. The only magic here is that of compounding interest.
Bottom line: the above chart shows national spending to be on a near constant growth path. It actually diverges little regardless of which party dominates. Much of our current national deficit, which adds to our debt, is not because spending is increasing at a faster growing rate — our ever growing deficit and debt is alarming because our economy cannot produce the revenue necessary to even get near our national expenses. With the IMF’s recent prediction that annual U.S. GDP growth will barely break 2% in 2010 then we are in trouble.
Red Flags: a country that grows its GDP by only 2% cannot afford debt equal to 9.5% of its total annual GDP.
- Is our current debt manageable?
- Is our credit rating in potential jeopardy? Either a ‘warning’ or a lowering of our credit rating per S&P would cause the interest that we pay on borrowed money to rise.
- Is there a point of default?
- Are there politically acceptable and economically sound ways to curtail and to shrink our national debt?
Over the next week I will review each of the challenges above and feedback to you what I find from the minds of various industry analysts.
View credit ratings of the different American states and various countries.
Questions? Comments? Help me research this by sending me your questions to email@example.com.
Ranting? If you wish to rant then just do it. However, meaningful questions serve a higher purpose. We need to move beyond the partisan ‘big lies’ that have gotten us into this predicament of owing the world so much money. There is no evidence since 2000 — when we actually had a plan to shrink our national debt and our national debt clock actually was reversing — that either Republicans or Democrats are serious about managing our national debt. So rant if you wish but please be bipartisan about it because neither party has anything to be proud of on this subject.