Northern Trust Senior Vice President and economist Asha Bangalore has summarized the current and projected debt situation of the United States—Part I and Part II. I believe it is important to look at those real or imagined data once in awhile so we fully understand what we're dealing with.
Total government debt (red bars) and debt held by the public (blue bars). The difference is money the government has borrowed from itself (i.e. from social security). This latter is called intragovernmental holdings debt, which I described in detail in Ten Trillion And Counting. The total debt is forecast to be somewhere north of $21 trillion in 2020 (21,000,000,000,000).
Total government debt as a percentage of nominal (not inflation adjusted) Gross Domestic Product.
Notice that the gross federal debt never reaches 100% of GDP in this projection, yet the total debt exceeds 21 trillion dollars in 2020. In fact, the Debt/GDP ratio actually declines after this year! How does this magic trick work?
Obviously, the Congressional Budget Office (CBO) has forecast that the economy (at least in nominal terms) will simply grow and grow and grow. This pollyannish assumption is crucial because it largely determines what the government's nominal income will be and, together with many factors that can't be known in advance, how much interest the government must pay on that 21 trillion dollars. However, if the economy is growing steadily in real terms—inflation is under control and thus does not eat up all that nominal growth—interest payments should not present much of a problem.
Net interest outlays on the debt. If we make some rosy assumptions about future GDP growth, the interest on the debt is "only" 800,000,000 dollars (left scale, in billions) in 2020. That's only about 3.4% of GDP (right scale), up from about 1.5% now.
All this optimism is making me a bit woozy, so I made the following flow chart to show where much (if not all) of that phenomenal future nominal GDP growth is going to come from on our current path.
Entitlement spending here is Medicare (health care) spending, which goes directly into the PCE part of GDP
There it is—America's Debt Wheel Of Fortune. Round and round it goes and where it stops, nobody knows! That's a lot for you to chew on today, so I think I'll cut it off right here. You might take a look at my post The Biggest Ponzi Scheme Ever Conceived if you're so inclined.
Have a nice weekend.
Every level of government is desperate for us to spend money, so they can continue to finance their Ponzi schemes. Actually, they want us to earn and spend, because they tax both. They tax it when you earn it, spend it, and save it. Of course, taxes these days include fees, penalties, surcharges, and the new boy on the block, forced health care premiums. They don't care how much you go into debt either, as long as you pay your taxes. Where is Robin Hood when you need him?
There lies the power of doing nothing, and that frightens the daylight out of them. The power isn't in doing something, it is in doing absolutely nothing. Hence, the great propaganda machine is running full tilt, least we all not participate in the great Ponzi scheme. Of course, the down side of doing nothing is, bringing the house of cards down on top of us. A nice double edged sword. Unfortunately, the house of cards may tumble even if we don't sit idly by, or are forced to sit idly by.
I know from speaking to others, my business isn't the only one that went on life support last year, yet the government is telling us, everything is getting better. Actually, my business, and others, is likely a case of the walking dead. Too stubborn to accept death, or the need to eat overrides logic. Still waiting for that government bailout that all those who are too big to fail received, and the trickle down that was suppose to result.
I wonder, does the average American know to the degree that the Fed has given them the shaft, over the past decade? I suspect if you do know, you know the consequences of doing something about it, hence you don't.
Posted by: BJ | 01/14/2011 at 11:05 AM