An Unwelcome Debt Milestone
Debt: Quietly, with the debt-ceiling imbroglio behind us, we’ve entered a new era. And, no, that’s not a good thing. Our debt now exceeds the size of our entire economy. Our economy won’t be the same.
With this correction, the markets have issued a stinging rebuke to those who believed that with the debt-ceiling impasse resolved we can return to business as usual. We can’t.
Those who carefully watch what the government does are no doubt alarmed it took just one day to raise the debt an additional $238 billion — or nearly 60% of that authorized by the debt-ceiling deal. Next week, we’re expected to add yet $72 billion more.
With all this, we have passed a frightful milestone: Total debt of $14.58 trillion now exceeds gross domestic product, putting us on a near par with such overly indebted basket cases as Greece, Italy, Portugal, Ireland and Spain.
But that 100% of GDP is more than just a number.
As we’ve noted before, the most comprehensive study of government debt and what it does to an economy was published in 2010 by economists Carmen Reinhart and Ken Rogoff. They looked at 44 countries over 200 years, the most ambitious study of its kind ever.
What they found should be as alarming to average Americans as it is plain to those on Wall Street.
“Over the past two centuries,” Reinhart and Rogoff wrote in “Growth in a Time of Debt,” “debt in excess of 90% (of GDP) has typically been associated with mean growth of 1.7% vs. 3.7% when debt is low.”
A cut of that size in average growth cannot be underestimated. In current dollars, it equates to $286 billion in lost GDP, rising every year with inflation — a huge slice off our future standard of living and quality of life.
Still wondering why the stock market is tanking?
With $14.5 trillion in total debt, we’re already in deep trouble. Where will we be in 2021, 10 years from now, when total federal debt is expected to reach as high as $28 trillion and GDP is (generously, in our view) expected to reach $23.8 trillion? Then, by conservative estimates, our debt-to-GDP ratio will be close to 120%.
In short, debt will be a permanent millstone around the neck of the once-vibrant U.S. economy.
We may already be seeing the effect of this in recent data. After first-half GDP growth was revised down from over 3% to just 0.7%, economists scurried back to their spreadsheets to lower second-half estimates. A double-dip recession now looms as a real possibility.