SPOOKY: US debt to surpass GDP on Halloween

J. Arthur Bloom Deputy Editor
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As children across America costume themselves as ghouls, ghosts, goblins and former North African dictators Monday night, they may have missed the most spine-chilling scare of the day. According to calculations based on the International Monetary Fund’s World Economic Outlook, on All Hallows’ Eve the United States’ total debt will surpass its Gross Domestic Product for the first time since World War II.

That means the average American’s share of government debt is more than an average American makes in a year. Spooky!

On October 19 Bloomberg released a chart showing that per capita gross government debt would to exceed per capita GDP in the very near future. As Bloomberg put it, “America’s bills are about to exceed its paycheck.”

The Bloomberg calculations, based on IMF data from the September World Economic Outlook, showed that by 2016, debt will exceed per capita production by $8,000.

A post at Zero Hedge by the pseudonymous Tyler Durden extrapolated the data to show that US debt would surpass GDP on Halloween.

SPOOKY: US debt to surpass GDP on Halloween (Source: Zero Hedge)

According to the Bureau of Economic Analysis, the United States’ second quarter GDP was $15.012 trillion. As of this writing, the national debt is $14.951 trillion.

In an interview with The Daily Caller, American University executive-in-residence Mark Waldman explained the meaning of the debt landmark. “It’s not as if there’s some big switch in the Treasury Department that flipped when that happened,” he said, “but the world notices, and it makes the world less willing to purchase our securities at existing interest rates. The reason that’s important is if we try to sell new debt and roll the old debt over at higher interest rates, then the cost of carrying the debt gets higher and higher and starts squeezing out other spending.”

And the political climate in Washington has so far squashed any ideas of real spending reductions, meaning investors have little reason to be confident in America’s long-term fiscal health.

“The bottom line is, it’s possible that our debt problem has passed the point of no return, given the political realities,” Waldman told TheDC. “Everybody’s talking about the extent to which they want to reduce the rate of increase in the coming years. That’s a totally phony discussion! Nobody’s actually talking about reducing the level of federal spending. They say that it’s only going to go up 5 percent instead of 7 percent.

“I’m sorry, but that’s not meaningful. We need absolute reductions. But nobody wants their Social Security cut, nobody wants Medicare cut. And I don’t see any leading Republican candidates willing to talk about reducing federal spending.”

On the flip side, Brian Wesbury, chief economist at First Trust Advisors, is skeptical of apocalyptic predictions for the economy.

“Some people say that when gross debt gets to be 100 percent of GDP, or 110 or 120 or whatever the number is, that it becomes a problem. I don’t believe that,” Wesbury told TheDC. “There are two things that matter as much as the level of debt, and that is the growth rate and the assets of the economy. Because in the end the income and the assets are what supports the debt.”

Viewing the debt in terms of the total size of the economy, Wesbury notes, the United States is doing better than a debt-to-GDP comparison might otherwise indicate.

“Right now in the US the private sector — individuals and businesses, which are owned by individuals — has around $150 trillion worth of assets. We have $15 trillion in GDP, and $15 trillion in debt; I’m rounding.”

Wesbury compared the United States’ situation to a company that owes an amount roughly equal to its income.

“If your grandparents passed away and left you with a business with $150 million in assets, $15 million a year in income, and a $15 million dollar bank loan, would you be mad at them? The answer is absolutely not — you’re wealthy beyond your wildest dreams.”

Waldman disagrees, saying it would instead be like “inheriting a company with 15 million dollars in income and a billion dollars in debt. It’s kind of a false comparison. GDP is what everybody in the country produces. You need to compare the debt to the federal income.”

Liberal economists often counter that the “public debt” is a better benchmark to use than gross debt, because it doesn’t include debts to the Social Security trust fund or other intragovernmental obligations. But short of simply stopping payment on Social Security benefits, these are obligations that the government will have to meet.

And according to Veronique DeRugy of the Mercatus Center at George Mason University, even the gross debt paints a picture which is rosier than reality.

“Even gross debt undervalues how much debt the government has, so no matter how you look at it it’s worse than you think,” DeRugy noted. “The good news is, there are reasons to believe that we can get away with a lot, but the fact that you’re not the ugliest at the beauty pageant is little comfort. We get away with being so fiscally irresponsible is because other governments are even more irresponsible than we are. Promising a legacy of high taxes and high debt for our children is not something to be cocky about.”

The rapidly narrowing gap between debt and GDP has many economists and pundits comparing the United States’ fiscal situation to that of Greece. Extravagant public spending, and in particular unsustainable pension commitments, led the Hellenic Republic down the road to near-bankruptcy. Greece narrowly avoided default on Thursday when eurozone leaders agreed to force a 50-percent writedown on Greek bonds and a $100 billion bailout.

Both Wesbury and Waldman agree America’s situation is not nearly as dire, though it bears some similarity to Greece’s underwater economy.

Waldman said a U.S. default was unlikely, but “look what just happened to Greece. Everybody who owns Greek bonds is taking a 50 percent haircut. Our currency is the world’s reserve currency. Our place in the world is supported by that fact.

“What the Greeks just did is default on half their debt. If we default on half our debt, that would mean we would have to pay super high interest rates to ever sell another Treasury security. So that’s out of the question. What we could do is have inflation and pay the debt back with dollars that are worth less than the ones we borrowed. When that happens, citizens like you and I pay the price because we have to pay higher prices for everything.”

Wesbury was more confident. “Yes, Greece had too much debt for their society, but they had tons of other problems. They had a culture of corruption, they had no growth, people were retiring at 52 and drawing on massive pensions. We have some of that.

“That’s not to say I’m happy that we have $15 trillion in debt, I wish we had zero. I wish we were running a surplus every year, but as of right now, the United States is nowhere near where Greece is today, or Italy, or Spain, or Portugal, or any of those.”

“Not that I’m happy with the direction of policy,” he concluded, “but this idea that we’re about to collapse sounds a bit like global warming talk.”

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