U.S. Federal Debt to Overtake GDP

Global markets are rattled by concern over the beleaguered economies of Portugal, Ireland, Italy, Greece and Spain, but the U.S. has its own debt issues no less sobering than those of these eurozone countries.

June 8, 2010

The U.S. government’s total debt crossed the $13 trillion mark for the first time in May 2010, and is projected to exceed the value of the nation’s gross domestic product in 2012.

Historically, the U.S. national debt only increased to finance wars, and was paid back down in times of peace. By the 1830s, the Revolutionary War was paid off, and by the turn of the 20th century, the Civil War balance was approaching zero. After World War i, the federal debt stood at 35 percent of gdp, and then the nation entered the Great Depression, prompting President Roosevelt to attempt to spend the nation out of hard times. Federal, state and local debts rose to an unprecedented level of 45 percent of gdp.

World War ii plunged Washington even deeper into the red. By 1946, government debt had soared to 121.2 percent of gdp. In the decades that followed, the post-war boom reduced the debt to gdp ratio until President Reagan’s administration increased it again to more than 50 percent of gdp to fight the Cold War. President George W. Bush further increased it to finance the war on terror and bail out the banks. Now President Obama is continuing the trend.

In 2009, federal debt leaped from 69.15 percent of gdp to 83.29 percent. This year it will climb to over 94 percent. The International Monetary Fund forecasts that 2012 will see U.S. debt surpass the gdp.

Pacific Investment Managing Director Bill Gross wrote in his June outlook report that “the debt super cycle trend” indicates that U.S. economic growth will not be enough to support the debt “if real interest rates were ever to go up instead of down.”

The major difference in the U.S. scenario and that of troubled European states is that while the eurozone countries are implementing or considering austerity measures, the U.S. Congress has not given any indication of curbing the nation’s borrowing trend. U.S. citizens drown in debt that the political system is unable to reduce, and policymakers actually expand U.S. debt in the mystifying belief that more spending will dig the nation out of its financial trouble.

The government’s attempts at inflating its way out of debt by creating the money needed to pay the bills undermine the value of the dollar. The U.S.’s focus on consumption and spending, instead of production and savings, will not only deplete the value of its currency, but also the standard of living of its people.

To understand more, read “Spending Our Way to Prosperity?”