Thursday, August 3, 2017

Our national debt is now larger than our GDP

Dr. Kamran Afshar, Chamber Chief Economist
The Chamber’s Finance Committee

National debt is now more than $19 trillion and appears to be continuing to rise for the foreseeable future. This puts the National Debt at 105% of the country’s Gross Domestic Product. For the first time since the end of WWII, national debt has topped the GDP. It should be added that at the end of WWII, National Debt stood at 121% of the Gross Domestic Product. However, the interest payment on that debt then was only 1.8% of the GDP. Which was due to the very low interest rates of the time.

In the early 1980s, debt level was around 35% of the GDP. However, the interest on the debt was around 2.3% of the Gross Domestic Product - a significantly higher interest rate environment compared to the mid-1940s. By the end of the 1980s, debt levels rose to 51% of the GDP and the cost of interest on the debt rose to 3% of the Gross Domestic Product - the highest percentage in the last 70 years.

The question is: how does this affect me? As interest payment on national debt takes a larger percentage of the GDP, more of national income is diverted from everything else to paying that interest, which will eventually mean higher interest rates, higher taxes, higher inflation, and cut back in government investment and larger deficits.

Since the start of the Great Recession, national debt as a percentage of the GDP rose. However, interest payment on the debt as a percentage of the GDP has dropped below 1.3 by 2016, the lowest ratios since the late 1940s.

Major concerns have been expressed about repayment of the national debt and potential for bankruptcy. Let’s look at the repayment mechanism. How did the country pay back the huge debt created during WWII which was 121% of the GDP? The answer to that is very simple; it was never paid back. Surprised? Actually, total debt rose by $700 billion between 1946 and 1981 while the debt to GDP ratio dropped from 121% to only 32%. Magic? No, the GDP increased 13-fold during the same period.

Also, since the national debt is in US dollars, unlike the Greeks who could not print as much Euro as they needed, the US can print as many dollars as it wants and then some. Therefore, bankruptcy is a technical impossibility for the US on its own national debt.

This does not mean that the size of the national debt does not matter. It simply means that as long as the debt level stays within historical boundaries, it will not become an economic issue.

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