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Monday, July 11, 2011

HOW SERIOUS IS OUR NATIONAL DEBT?


Our national debt was significantly increased to avoid what was looking like a coming depression at the end of the George W. Bush era.  Those curves above look ominous and must over time be reduced.  However, for now, it does not matter.  As my readers know, I am actually proposing that the "Simplest Solution for Our National Debt..." would be to ...increase it.  To quote from my blog of ten days ago:

What will happen is that the $4 trillion in budget savings over the next decade being discussed will not be attained.  The parties will compromise at around $2 trillion and push off the contentious issues until the next time.  The debt limit will be raised to around $15 trillion.  The Congress might miss some recess this month, but the USA will not go into default.

This next time will be 2113, for President Obama is not an idiot, and doesn't want this issue hanging over his re-election campaign, even though it has very little to do with our economic health.  To further quote:

The debt during these times of low interest is really a non-issue (read myHuffPo as to why).  However, the Republicans know that the average voter does not like to be in serious debt (but personal debt is not akin to national debt, which is closer to the financial situation of companies, which is to borrow at low interest to make higher profits), so are playing their "Obama is a one term President" card by trying to embarrass him.

Thus, it is, indeed, important to the average voter, and the Republicans are taking advantage of this confusion.

For example, here is the public debt/GDP ratio rating from the Central Intelligence Agency and International Monetary Fund:

       COUNTRY          DEBT/GDP   DEBT/GDP
                                         (CIA)             (IMF)

1     Japan                          226                 226
5     Greece                        143                 130
6     Iceland                        124                 116
8     Italy                            119                 118
9     Singapore                    102                   99
11   Ireland                          96                   94
14   Portugal                        93                   83
15   Germany                       83                   74
16   France                          82                   84
21   Israel                            77                   76
23   UK                               77                   77
25   Australia                       72                   70
32   Spain                           60                   65

       WORLD AVE.              59           

36   USA                            59                    93

Why are the CIA and IMF so different sometimes, especially for the USA?  This has to do with accounting, and the amorphousness of these numbers.  By the way, China is #111 at 18% and Libya is #126 at 3%.  

There is another ratio, gross debt to foreign countries/GDP, and for the U.S. this is about 95%, Japan 45%, UK 400%, Ireland 1003% and Luxembourg 3443%.  Supposedly, Brunei, Liechtenstein, Palau and Macau have no external debt.

In any case, the U.S. is actually below the world average in DEBT/GDP ratio.  More importantly, though, are the numbers behind these numbers.  Take interest rate on borrowed money.  Japan should be a basket case (it might now be, unfortunately, because of Fukushima), but it is surviving because most of what they owe is to their own people, with an average interest rate around 3%.  Greece looks bad, but is worse, because the average interest is at 6%.  We only pay 3%.  

Yes, we do owe more than $14 trillion, so what about the dangers of inflation?  Let's say you borrow a million at 3% for 10 years and the interest rate suddenly jumps to 6%.  You can now lend your 3% interest liability to someone else at 6% and make money.  For the same reason, China cannot suddenly pull out.  They can stop lending to the U.S., but we are their most reliable customer.  They began hedging towards resources in Africa, but are finding out that the risks might be untenable.  Are they concerned about the passion play in Congress and the U.S. defaulting?  Of course, but not because they won't get repaid.  This brinksmanship game could well destabilize the world economy and even trigger a depression.  The market jumps and falls on real and irrational rumors.  The volatility is scary.

So how serious is our national debt?  There is no looming crisis.  My predictions are:

1.  In a week or two Congress and the White House will settle on increasing the debt to a little more than $16 trillion, which should carry Obama through the 2012 presidential election.  Some revenues will be extracted from really rich people and there will be a few minor concessions regarding entitlements.  Some day soon, the workers contribution will need to be higher and the retirement age could well be raised to 70 (for those entering the job market), but this will not happen now.  The historical top tax rate for the rich is interesting:

1925   25%
1935   63%  (there was that depression in 1929)
1945   94%  (World War II)
1955   91%
1965   70%
1975   70%
1985   59%  (those Reagan years)
1995   40%
2005   35%
2011   35%

2.  Even though the average person is paying at a lower tax rate than in over half a century, tea party types will continue to be irrational about taxes.  Here is a quote that explains part of the problem:

Of people who support the grassroots, "Tea Party" movement, only 2 percent think taxes have been decreased, 46 percent say taxes are the same, and a whopping 44 percent say they believe taxes have gone up.

3.  Playing the perceived illogical sentiments of the people will continue to be the game plan.  As New York Times columnist, David Brooks, has said, "the Republicans must choose between rhetoric and common sense."

What has happened, of course, is that the Republicans have used rhetoric as the common sense to put a Republican in the White House, or, at least take over the Senate.  And it is appearing that the public is buying this strategy.

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The Dow Jones Industrials sunk 151 (-1.2%) to 12,506, concerned about the growing European monetary crisis. World markets were almost all down, with France and Germany dropping more than 2%.  Gold went up $11/toz to $1555.  On May 2 it was $1577 in U.S. dollars.  However, today was an  all-time high for gold in Euros and Pounds.

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A tropical depression formed west of Hawaii, will move further west, and could become a Category 2 typhoon by the time if rolls through, perhaps, Taiwan or Okinawa or the Philippines.  A disturbance also popped up just south of Hawaii, will probably move west, but could go north.


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