Monday, February 9, 2015

Our High Federal Debt is Killing Our Economy

Currently, our federal government debt stands above $18 trillion; up from $10.6 trillion when President Obama took office.  By the time he leaves office the debt be another $2 trillion larger and his latest "budget" -- as if spending more than you take in is budgeting -- will tack on another $6 trillion by 2025.  By that year, our federal debt will be at least $26.3 trillion.

The problem with increasingly high national debt is that it is killing this country's economic growth.

To that point, please examine this chart closely:

Click on image to enlarge
What is clearly shown is that, following World War II, we had massive debt that was 120% or 1.2 times (the red line) higher than the total output of our entire economy as measured by Gross Domestic Product (GDP); the blue line.  From that point forward, the country worked off that debt with positive budgeting.  Eventually, it decreased to a very manageable 31% of GDP by 1980.  During that time, our economy (GDP) grew at an average annual rate of 3.8%.  Then, Reagan came to office and, during his two terms, the debt-to-GDP ratio went from 32.5% to 53.1% and the average annual GDP growth slowed to 3.6%.

In 1993, Clinton came to office and because of an agreement he made with Newt Gingrich and his "Contract with America," he lowered the debt.  The ratio fell from 64% to 54% and the growth in GDP in his two terms returned to the post war average of 3.8%.  Still, over all, from 1981 to 2000, the average GDP growth was only 3.4%; primarily because of the "H.W." Bush recession.  Then in 2001, 9/11 hit and the U.S. started increasing the debt again with tax cuts and security measures; and, two wars in the Middle East.  Thus, under "W" Bush the debt ratio rose throughout his two terms in office and GDP growth was 1.8%.   Now, spending and debt accelerated under Obama and the debt ratio rose from 64% to over 100% in 2012 (on this chart); 105% as of right now.  GDP growth on his watch was slightly better than Bush at 1.9%.  But, understand that 1.9% included a better than average 2.5% growth in 2014 because of an accounting change that added intellectual property to the methodology in calculating GDP and, which, probably added a full percentage point growth to the 2014 number.  Thus, historical apples-to-apples growth calculation of GDP should have only been 1.5%.

Simply, high debt ratios kill economic growth.  If our economy continues to grow at 1.9% through 2025, the GDP will stand at $21.2 trillion and if out debt rises to the Obama Administration's projected $26.2 trillion, the debt ratio will be 123%.  A ratio higher than after World War II.  But, my guess is that the current 1.9% will fall as the debt ratio continues to rise.

I realize there are some out there who aren't buying the correlation of a high debt ratio to slowed GDP growth.  Then I would point to a country like Italy that has been growing their debt for decades.  In 2013, its debt ratio rose to 130.4% and its GDP growth looks like this:

Clearly, high debt has stymied Italy's economy and, I could show you similar charts for all those European countries that are in financial trouble.  This is why we, as a country, need to stop this debt accumulation because President Obama has already put us above the ratio of 100%. 


President Barack Obama on Monday unveiled a $4 trillion fiscal year 2016 budget that will add more than $6 trillion to the national debt over the next 10 years:

Obama Wants Huge Spending Hike As Debt Tops $18 Trillion:

Projected Debt in 2025 Due to Obama's Budget: $26.3 Trillion:

Debt Clock:

Debt under Reagan:

Really? The Fastest Growth In GDP Since 2003?:

Italian government debt - Wikipedia, the free encyclopedia:

Greece still bust, Spain depressed, Italy paralysed:


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