Our Debt-to-GDP Ratio Is Less Important Than Amounts Needed To Service the Debt

A few weeks ago, the head of the Congressional Budget Office told the Senate Budget Committee that our debt, as a percent of Gross Domestic Product (GDP), is already too high by historical standards.  His department's work showed that our debt will be 74% of GDP by the end of this year and 79% by the end of 2021. He then went on to say that the current trajectory of increases is pushing us toward a fiscal crisis whereby investors would require increasingly more interest to service our increased debt.

The problem I have with simply measuring debt as a percent of GDP is that it doesn't tell the whole story.  In my opinion, a more serious issue is whether or not a country has to borrow money to pay down the interest on the debt that it has already accumulated.  This, in much the same way that a consumer gets into trouble when they continue to use their credit card while only being able to pay the minimum amount due each month.

Sadly, the U.S. is already in this economic death spiral; regardless of what our debt-to-GDP ratio is.  To that point, I present the following table that extracted its data from the President's own Office of Management and Budget (OMB) report:

* OMB Estimated in Billions of Dollars

What this simply shows is that from 2010 to 2017, the Federal government expects to take in $1.8 trillion in new revenues.  At the same time, it will spend $2.6 trillion paying down the interest on the debt.  Therefore, the Federal government will borrow nearly another $833 billion so that it can merely pay off the interest. Also make note of the fact that the borrowing grows exponentially, starting in 2015, as the spiraling debt accumulation takes effect.

One last important point.  All these numbers assume that interest rates will remain historically low with the Federal Reserve holding them between zero and one-quarter percent; and, the Fed will continue to keep those rates low as long as inflation is tame.  However, if they are forced to start raising rates because of rising inflation, then the interest on the debt payments will simply explode.  That's when this country gets into real trouble.


References:

President's Office Of Management and Budget: Revenues (Table 1.1) and Interest on the Debt (Table 2.1): http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf

U.S. on ‘unsustainable’ budget course: CBO: http://www.marketwatch.com/story/cbo-issues-fresh-long-term-debt-warning-2013-09-17

Debt: Elemendorf comments to Senate Budget Committee:  https://www.youtube.com/watch?v=Pz-3cQBDJ_w

"CBO estimates that federal debt held by the public will equal 74 percent of GDP at the end of this year and 79 percent in 2024 (the end of the current 10-year projection period). Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt). - See more at: http://cnsnews.com/news/article/susan-jones/cbo-director-large-and-growing-federal-debt-could-produce-fiscal-crisis#sthash.4KYAwfJi.dpuf

"CBO estimates that federal debt held by the public will equal 74 percent of GDP at the end of this year and 79 percent in 2024 (the end of the current 10-year projection period). Such large and growing federal debt could have serious negative consequences, including restraining economic growth in the long term, giving policymakers less flexibility to respond to unexpected challenges, and eventually increasing the risk of a fiscal crisis (in which investors would demand high interest rates to buy the government’s debt). - See more at: http://cnsnews.com/news/article/susan-jones/cbo-director-large-and-growing-federal-debt-could-produce-fiscal-crisis#sthash.4KYAwfJi.dpuf