How Long Can We Ignore Our National Debt?

It continues to amaze me how grown men and women in Congress can continue down the path to disaster by taking no serious action on our debt issue.  This has to go down as one of the most   irresponsible and despicable behaviors of our President and Congress in our nation’s history.  And where are the young folks who are going to have to bear this burden?  They are nowhere to be seen.

A friend recently sent me an email to better characterize the recent “cuts” that Congress made.  When you see the numbers it pretty much puts everything in perspective when looking at our spending problem—and THAT is the problem—yes, federal revenues are down due to an impotent growth strategy (s) that the current administration is promoting, but the real problem is spending.  We all know this clearly. 

Here are the numbers for this fiscal year:

US Tax Revenues:  $2,170,000,000,000
Federal Budget:  $3,820,000,000,000
New Debt:   $1,650,000,000,000 
National Debt:   $14,272,000,000,000
Proposed Budget Cuts $38,500,000,000

Now just remove eight (8) zeros and pretend this is your family budget to get a real feel for how our gutless Congress and President acted a few months ago in “cutting” spending.

Annual Family Income: $21,700
Money the Family Spent: $38,200
New Debt on the Credit Card $16,500
Balance on the CC  $142,710
Total Budget Cut  $385

So you see, the budget cuts that were made are actually far less than the debt service even on the new debt on the credit card for the year—not to mention the debt service on the total outstanding balance.  Would we get away with running our family budgets this way?  Why should our elected officials get away with managing “our” money this way?

Let’s take a look at our total debt– $14,587 trillion (it is actually higher than reflected above in the numbers).  This can be divided into public debt, that is, the Treasury securities held by individuals, financial institutions, and foreign governments AND the intra-government debt, the sum of Treasury bonds held by agencies of the federal government, principally the so-called Social Security Trust Fund.  The liabilities represent the future pensions, health care, social security payments, etc that are promised under current legislation—both are REAL obligations. 

The split between public debt and intra-governmental debt is $9.924 trillion and $4.666 trillion respectively.  This is over 300 million times the country’s median household income!  Stacked as dollar bills, it would reach 920,953 miles high, almost four times as far from Earth as the moon.  The real issue here is the debt’s size relative to gross domestic product—what this is saying is no different than the way we individually measure our own debt. Translated, it is our personal debts measured against our income.  The GDP of the US was $15 trillion at the end of the first quarter in 2011.  This translates to making our public debt at 66.1% of GDP and the intra-governmental debt at 31.1%.  Total debt is now 97.2% of GDP and growing!

The scary part is of course the size but the scarier part is the rate of growth.  For example, our debt in 1946 was $269 billion and 14 years later in 1960 it was $286 billion.  The economy during these years grew rapidly so that in 1960, the debt was only 58% of GDP.

In the 1970’s under Paul Volcker as Fed chief, the debt began its soaring.  Why?  Quite simple—Washington continued to increase spending faster than government revenues increased (Note: revenues increased a huge 99.4% in the 1980’s).  The debt was 58% of GDP in 1990, a full 24 percentage points above its 1980 lows.  It continued to increase dramatically in the early 1990’s under President Bill Clinton reaching 68% of GDP in 1994.

But, Newt and the republican Congress came into power, and represented the first time the Republicans controlled both houses of Congress since 1954.   In the next six years, while revenues increased 61%, federal outlays increased ONLY 22%!  As a result, the debt relative to GDP declined between 1994 and 2000 to 57% from 68%–and in 1998-2000 actually showed the first surpluses in the federal budget in over 30 years.  I have written about this before—it was not due to Bill Clinton’s policies—it was due to the republican controlled house under Newt Gingrich-and their ability to cut spending—and move Clinton to the center.  That is fact!

In 2001 following the collapse of the dot com bubble and rising unemployment, the 2003 debt to GDP ratio had risen to 61.7%  Many did and continue to blame the Bush tax cuts for this however, that is simply wrong.  As I have written many times in the past—when you cut rates, tax revenues actually increase because companies and individual entrepreneurs go out and invest, create jobs, and more jobs and healthier economies produce more wealth, which in turn generates more tax revenues.  This is exactly what happened after the Bush tax cuts were put into place.  Federal revenues before the Bush tax cuts were put into place declined 12% in the early part of the decade, but when the tax cuts were implemented in 2003, the economy began to grow strongly and federal revenues in the next four years grew by a staggering 44% while unemployment fell to 4.2% from 6.2%.  Federal outlays increased during these years by a meager 26.4% and debt-to GDP ratio increased to 64.8% by 2007, which was below what it had been in 1994 (read this Mr. Obama and Nancy P, and Harry R).
In 2008, the debt-to GDP ratio soared to 67.7%.  A year later, under President Obama, it took another leap to 84.4%, a year later to 93.8% and it is headed real quickly to 100%.

No one expects to pay off our $14 trillion debt, but we do expect our government officials to get a handle on our debt issue and put into place a comprehensive spending cutting plan that will get our debt- to –GDP ratio back down to historic levels.  Specifically, they must not only stop the rate of growth, they must reduce the rate of growth over the next ten years.  I have represented in the past that we should have a debt plan to reduce our debt by $1 trillion/year for the next 10 years!
This can ONLY happen if the American electorate sends a solid message in November 2012 and do exactly what they did in November of 2010.  This is our system—this is our way to effect “change”.