The U.S. Federal Deficit Reaches A Tipping Point

Forbes ^ | 09/28/2011 | Steven Cunningham and Polina Vlasenko

[SeekAndFind]

As Congress’ debt-reduction “super-committee” meets in Washington it should focus not only on ways to curb spending or increase revenues, but on a question that is central to America’s economic well-being: How high can the debt get before it harms growth?

When nations accumulate a certain level of debt, growth suffers. For the United States, that moment is now.

Currently, total federal debt stands at $14.7 trillion, or around 98% of gross domestic product, a level not seen since the end of World War II. Debt financed by private investors, as opposed to that held by government, is about $10 trillion, or 67% of GDP.

Worse, despite promises by both Democrats and Republicans to slow the pace of deficit spending, there is really no end in sight. The Office of Management and Budget (OMB) projects that by 2016 gross federal debt will reach 105% of GDP, and debt held by private investors will reach 76%. According to the Congressional Budget Office (CBO), if current policies continue federal debt held by the public will grow to 82 percent of GDP by the end of 2021. This doesn’t bode well for the economy.

When annual deficits and the resulting debt are large relative to the size of the economy, a substantial portion of productive resources is allocated by government fiat. Whether this is harmful to economic growth depends on how effectively government uses the resources, compared to how they would have been used in the private sector.

To determine whether a government program is helpful or harmful to the economy, we have to compare its impact to that of projects the private sector would have undertaken had the resources been left in its hands. This is not easy.

[steveshoveler]

As Congress’ debt-reduction “super-committee” meets in Washington it should focus not only on ways to curb spending or increase revenues, but on a question that is central to America’s economic well-being: How high can the debt get before it harms growth?

The answer is, much higher than it is now, that's not the problem. The problem is that our entire system of money is BASED on federal debt, THAT is the thing which has to be fixed. For that matter, so long as we persist with the present system, locking a debt ceiling for all time would simply lock our economy into yesteryear for all time, it makes good rhetoric but it's basically an exercise in futility.

[org.whodat]

With news like that boner may miss a minute of golf this weekend.

[anoldafvet]

Just for fun I plugged our $15 trillion debt into a mortgage calculator at 5% for 30 years. The result: $80.5 billion a month for 30 years, and that’s if we stop spending now.

[Vaduz]

anyone want to keep thetr comgress critter in the next election?.

[steveshoveler]

The really big problem with federal debt is that some future generation could simply repudiate it. They’d be within their rights, they never contracted it and they do not owe it.

[MontaniSemperLiberi]

“The answer is, much higher than it is now, that’s not the problem.”

History disagrees.

At a 90% level financing the deficit requires so much money that it significantly affects growth because the government must raise interest rates to attract enough investors.

Before it reaches 125% the risk of repayment becomes so high that interest rates climb out of double digits and default becomes certain.

(”This Time is Different”, a 125+ page pdf, http://www.nber.org/~wbuiter/cr1.pdf)

From the article we are at 67% now (actually closer to 70%, they are a bit behind) and adding 10% per year. Our GDP is not growing so we won’t be able to “grow our way out of it” before the next president faces a 90% Debt to GDP level.