Here is an interesting chart from the IMF:
It says that the US debt per capita is poised to exceed the GDP (gross domestic product) imminently. GDP is an economic measure for the total dollar amount of goods and services produced by an economy. This is another way of saying that public debt will exceed GDP. The chart only considers federal debt, not state & local and not household. US state debt is estimated to be $4.2 tillion. Roll those in and the number looks even more dramatic.
To put it into historical perspective, the current debt/GDP ratio is up from 51% in 1988. From the chart, beginning in mid-2004, debt began rising at a much more rapid rate than GDP. The cross-over point is just below $50k, which means each person in the US owes the equivalent of $50k if the debt were distributed. In two years, the US debt will reach 120% of GDP, which is where Italy is right now punch drunk and on the ropes.
Looks dire, doesn’t it. That’s because it is.
I am left wondering what is the implication of the cross-over point. The fact that debt will exceed GDP may be more symbolic and emotional than an actual problem.
At a micro-economic level, households routinely hold more debt than they have income. From a macro-economic perspective, what really matters is a country’s ability to service its debt. At a minimum just paying the interest, but at some point actually paying down the principle. The big problem in the EU with Greece and other countries is an inability to service debt and roll it over when it comes due at anything but punitive rates.
Management of the econony and debt follows the thinking that you need to create 2-3% inflation and 2-5% growth. Then a deficit of 3% of GDP, or more when the economy dips, is no problem. New debt can be issued, and maturing debt can be rolled over (but never really paid down). The debt level remains “sustainable.” Until the percentages go out of whack.
So what is the implication of the chart for the US right now? For FY2012, US federal govt spending is budgeted at $3.7T, with $240B, or 4.6% of spending going towards interest payments on the $14T national debt. Demand-side economists argue that 4.6% is not a large number, is quite affordable and is lower than many years recently passed. They also argue that now is the time for government to borrow big to spend our way out of the current economic malaise.
But there is not much time. US deficity spending is now running at about 38% of the budget, or for each dollar it spends, it borrows an additional 38 cents to make ends meet. This of course adds to the ever growing pile of debt. Italy, Greece, the US, and some other countries have deficits that are 8-10% of GDP, far beyond the rate at which a developed country can grow. At these levels of deficit spending, even during a period of aggressive growth of 5%, the debt problem only gets worse.
I support stimulating the demand-side in the current economic situation through increased government spending. I don’t like unrestrained borrowing to finance consumption, but the state of the global economy is such that we need to pump up demand right now. Austerity will lead to deep and enduring economic pain.
There is an underlying structural problem, however, that may never get dealt with. “Economic progress” is achieved through continuous growth. The global capitalist economy is a consumption monster. It requires ever expanding demand and needs to be fed ever increasing amounts of money. And we (the consumers) have been behaving appropriately.
At some point in the not too distant past, let’s say 30 years ago, demand exceeded economic surplus (free income for households and revenue for public sector). The only way to feed the monster was with borrowed money. Governments wanted to please their constituents with more services, but did not want to raise taxes to pay for them. As wages stagnated for the 99%, borrowing to finance consumption became an addictive habit.
In order to satiate the beast, governments drove down the interest rate to make borrowing cheaper and encourage even more spending. The debt hole grew ever deeper.
This is where we are at today. Nobody has any money and are all hung over from the debt binge. But the monster is still hungry. If we don’t feed it, millions will lose their jobs and join the millions that don’t have jobs. If we borrow to feed it, we are clearly taking from the future, with implications for at least one or two generations downstream. Bitter medicine, to say the least.
Here is a sobering article on the European debt crisis, arguing that the line be drawn and the banks take a 50-60% “haircut”. What I find most troubling is the effort finance ministers undertake in order to circumvent laws designed to prevent economic cataclysm. “… rather than getting budget deficits in line, fancy schemes are devised to borrow more, print more, and add leverage to the mix. Losses, risks, and mountains of debt are shifted from one country to another, from banks to the taxpayer, and from one generation to the next.”
Somehow we need to kick the consumption- /debt-driven merry-go-round that demands servitude and debt peonage in return for a continuous supply of disposable trinkets.
With everything that is going on in the world, I sometimes wonder whether we are living in the Matrix, Orwell’s 1984 or some other alternate universe.