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| Putting the US Debt into Perspective |
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Many people still don’t think the amount
of debt the US government has amassed is anything to worry
about, most commonly because it is still inconsequential relative
to the US economy. As much as the nominal debt may have grown,
the growth in the US economy has ensured that servicing and
carrying the debt is not a problem. Stated another way, the
US debt as a percentage of US GDP (gross domestic product)
has not grown out of hand and therefore the nominal amount
of debt is nothing to worry about.
Let us examine that proposition for a minute.
Below is a chart of the annual US GDP, the US government debt,
and the US government’s debt as a percentage of the
US GDP.
The exploding debt during the Second World War
is obvious, but notice how long it took the debt to GDP ratio
to decline to pre-war levels. The level of actual debt has
never declined, except for an insignificant $1 billion decline
in 1946 and an equally insignificant $2 billion decline in
1949. The US debt has expanded every year since World War
II.
Another interesting fact is that from around 1945 to about
1985 the US economy was growing at a faster pace than the
US debt. This is evident from the decline in the debt to GDP
ratio. Since 1985, however, the situation is exactly the opposite:
the US debt is growing much faster than the US GDP.
The debt to GDP ratio improved during the late
1990s and the current rate of growth in the ratio is much
less than it was during the eighties. But that reversal of
the ratio in the late 1990s was due to the influx of foreign
capital into the US and the subsequent stimulus this influx
of capital had on the US economy. As a result tax receipts
by the US government rose dramatically (all those capital
gains during the tech bubble and stock market boom). That’s
over and the debt to GDP ratio is once again on the rise.
Also, we have not seen the reversal of those international
capital flows -- something that has been discussed at length
in these pages -- and when that reversal occurs it will not
only cause the dollar to decline, but will also cause the
US debt to increase.
Regardless of what the Fed, the White House,
the Senate or the press want you to believe, if China and
Japan stop supporting the US dollar, US medium to long-term
interest rates are going to rise. That would put a drag on
the already anemic US economy, which means tax receipts by
the US government will decline at the same time as the interest
charges on the US debt will rise. The problem is that the
US government is more likely to increase its deficit spending
than to cut it, in an attempt to add stimulus.
The current debt to GDP ratio is almost twice
as high as the debt to GDP ratio during the final stages of
the Vietnam War and compared to Vietnam the US’ current
military adventures are skirmishes. If we combine increasing
military spending with an increase in domestic deficit spending,
higher interest rates and lower government tax receipts, then
the debt to GDP ratio could rapidly approach World War II
levels.
Anyone who is not alarmed by the increase in
US government debt is living with his head in the sand.
Paul van Eeden
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