Market Overview

THE NATIONAL DEBT: How to Cut the Debt and Resume Economic Growth

Consider these questions:

  • How long will foreigners be funding our debt?
  • Will the massive debt stifle future growth?
  • How much is too much debt?

According to Carmen M. Reinhart and Kenneth S. Rogoff in The 90% Rule (Bloomberg Businessweek, July 18-24, 2011) international research suggests that until debt reaches 90% of GDP it won't impact economic growth. Cross the 90% mark in debt levels and median growth drops 1%.

Usdebtclock.org approximates the national debt at $14,670.751,000,000.00 and the debt to GDP ratio at 98.46%. Any way you look at this data, this is way above 90% and even the most uneducated folks can see that this is way too much debt for growth to continue at any sort of normal pace.

Great, so the answer to all of our debt problems is to keep debt levels under 90% of GDP and we're all good! Simple, cut the ratio by 8% and growth will improve to sustainable levels. There is little dispute that the national debt needs to be reduced, but there is no consensus how to accomplish the reduction.

If it sounds too simple to be true, it probably is.

After all, how does one categorize debt, is it only that of the central government? What about all of those other public liabilities, including social security and future government obligations?

Is 89% okay but 91% no good? Yes, this is all way too simple an answer.

Economists are all over the map on the debt level and what to do about it. I remember learning about debt in my undergraduate economics class, Money and Banking, that debt levels do not matter. Yet, let's forget about the experts for a moment and think logically.

Think Logically About Debt

Debt is an obligation to pay back a loan. If you are using current financial resources to pay back that loan, unless the money you borrow is earning a higher return than the interest you are paying, it is a drain. Each citizen's share of the national debt is $47,004.00. We owe this money to our creditors, those who buy our government bonds.

Eventually, it needs to be paid back; if not in our lifetime, than that of our children or grandchildren. Historically, high debt levels lead to high inflation, which makes costs rise, frequently, more rapidly than income. High inflation is not good for a country or its citizens.

The Takeaway

A bit of debt can be a good thing; particularly with these low interest rates, it offers more capital for progressive projects which would expand the economy, and create more jobs. Debt used to fund our government's day to day expenses is just irresponsible.

The government needs to take the high and unpopular road. Cut some programs, raise the retirement age, and get rid of waste. Follow that with a slight increase in taxes and the debt will get paid off, companies won't be scared to hire, banks will feel confident to lend, and maybe the S & P will raise our credit rating!

The economic solution for the government is comparable to that of a family. Live, spend, and borrow in moderation. Realize that neither as individuals nor as a country can we solve all American and world problems and yet if we continue to bow to special interests and fear cutting and saying “no”, the results will be disastrous.

The Answers

  • How long will foreigners be funding our debt? It is unknown how long foreigners will be willing to fund our debt.
  • Will the massive debt stifle future growth? Clearly, the massive debt stifles current and future growth.
  • How much is too much debt? The current debt levels are too high!

Barbara Friedberg, MBA, MS is editor-in-chief of Barbara Friedberg Personal Finance.com where she writes to educate, inspire, and motivate for wealth in money and life. Learn about personal finance from a real life Portfolio Manager & MBA professor! Stop by the website and download a valuable free eBook, 20 Minute Guide to Investing.

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Barbara Friedberg, MBA, MS is editor-in-chief of Barbara Friedberg Personal Finance.com where she writes to educate, inspire, and motivate for wealth in money and life. Learn about personal fin

Posted-In: american economy GDP Inflation jobs national debtTopics Economics General

 

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