National Debt vs GDP - why does it matter?

[Peatree]

The Outstanding Public Debt as of 28 Nov 2011 at 05:27:22 PM GMT is 15,054,997,576,083.

USA GDP is ~15,227,000,000,000.

Supposedly the debt is increasing at a rate of 3,970,000,000 per day.


So, let's discuss. What is going to happen and/or what does it mean to us when the debt is greater than the GDP? Anyone have a clue? :eek:

[bionicbadger]

It doesn't much matter anymore. Its only a matter of time until the US defaults. The political system pretty much ensures that will be the case.

[Hasbinbad]

Am I totally off base or is "debt" a total amount and "GDP" a yearly amount?

I think the proper comparison should be "deficit" vs. GDP?

Unless there is some weird accounting math that I'm just ignorant of?

[Asher]

The Outstanding Public Debt as of 28 Nov 2011 at 05:27:22 PM GMT is 15,054,997,576,083.

USA GDP is ~15,227,000,000,000.

Supposedly the debt is increasing at a rate of 3,970,000,000 per day.


So, let's discuss. What is going to happen and/or what does it mean to us when the debt is greater than the GDP? Anyone have a clue? :eek:

I think it was Dick Cheney that said deficits do not matter. You don't hear much of that talk anymore from anyone.

Asher

[Hasbinbad]

Guys debt is not the same as deficit.

[Peatree]

The National Debt is the total amount of money owed by the government; the federal budget deficit is the yearly amount by which spending exceeds revenue. Add up all the deficits (and subtract those few budget surpluses we've had) for the past 200+ years and you'll get the current National Debt.

[Hasbinbad]

Right, so why are you comparing debt to gdp, isn't gdp a yearly amount as well? What does that have to do with anything?

It's like comparing an individuals income (say, 80k) to their total debt (mortgage, car notes, etc., say 800k).. Yes, 800k is MORE than 80k, but that relationship isn't descriptive of the system.

[Peatree]

It's my understanding that when our national debt is greater than our GDP, then we are screwed some how. I am simply wondering what it means in plain person talk vs. all these economists that are discussing it. Make sense?

[Peatree]

For example, per the "Wall Street Journal"...

"In stark but simple terms, unless Americans are made aware of this financial crisis and demand accountability, the very fabric of our society will be destroyed. Interest rates and interest costs will soar and government revenues will be devoured by interest on the national debt. Eventually, most of what we spend on Social Security, Medicare, education, national defense and much more may have to come from new borrowing, if such funding can be obtained. Left unchecked, this destructive deficit-debt cycle will leave the White House and Congress with either having to default on the national debt or instruct the Treasury to run the printing presses into a policy of hyperinflation."

Does this mean I only have to worry about high interest rates? I don't really use a credit card, and typically pay cash and/or own what I need, so does this effect me or not?

[Hasbinbad]

some how
HOW?

[pickled_heretic]

http://www.cornerstonesworld.com/files/A2_Public_debt_percent_gdp_world_map.jpg

the russians had a complete economic collapse post-perestroika, the US has absolutely nofuckingexcuse

[Galanteer]

http://www.nationmaster.com/graph/eco_pub_deb-economy-public-debt

[Zenlina]

Once upon a time a country’s currency was tied to the amount of gold stored in its treasury: those were the days of the gold standard, abstract enough. But beginning in July 1944 the Bretton Woods system tied the value of every participating country’s currency to the U.S. dollar, making the U.S. dollar the de facto standard, or item of last resort. Then in August 1971, U.S. president Richard Nixon declared the American dollar would no longer be tied to the American government’s existing gold reserves but simply to its promise to pay.

In the end i dont think it would matter, to me the US dollar is make believe at this point. If they run out, they just print more and more and eventually abolish it altogether and start from zero which would mean the US will be the richest country. Should really look up why Iraq and Libya was blasted by the US. Iraq i believe was trading on Euro only, and Libya wanted to put in a new currency working off the gold standard. The US govt wasnt too happy about that thus made up excuses to take them out.

Hence, for the original question... nothing will happen, would just make up more make believe wars to offset the debt or remove it.

[Truth]

who cares about the fake economy built on fiat currency

system is mathematically impossible to repay by design.

it's called debt slavery what a wonderful world left by your grandparents that you have now left off worse for your grandchildren

[Hasbinbad]

it's called debt slavery what a wonderful world left by your parents and grandparents (if you're very young), who were mostly on the right track in the 60's, until the CIA introduced cocaine in massive amounts and caused all the social activists to become complacent for 4 decades
fix't

[Truth]

The final takeover began in 1913 and was established irrevocably in 2001.

[Hasbinbad]

Kennedy was the last president with any balls. You saw what happened to him.

[to0p]

Kennedy was the last president with any balls. You saw what happened to him.

Yeah you dont fuck with the wrong RL guild. :cool:

Like Raegan said - I am not worried about the deficit. It is big enough to take care of itself.

[Kraftwerk]

To understand the importance of Debt to GDP you've got to understand a few terms and how it is applicable historically:

Total US Public Debt - This is the total amount of Federal Government debt held by two subgroups, those being : The Federal Government itself (~30-35%) and Other Investors (The Fed [Satan], private investors, international investors, state/local governments)

GDP - Gross Domestic Product, you're right this is just a measure of total production annually. There is a lot more detail on this with GNP/GDP and product at home/abroad etc. but for all intents and purposes lets just play with GDP, the big one. This is the monetary value of a nation's annual production. Ours currently is just a bit north of $15T.

Federal Budgetary Deficit/Surplus - The surplus or shortage of government funding in relation to government spending over a given period (annually). This year we're facing a $1.4T deficit (I believe)

Now where it gets interesting is the relationship. The Debt/GDP ratio is important mostly as a resource for gauging the sustainability/credit of a sovereign. For a sovereign sitting at $15T GDP, if their debt is $7.5T then they're at a 50% Debt/GDP ratio. For private investors (the majority of holders of sovereign debt), this is appealing because the interest rates being paid annually on debt for a sovereign holding 50% Debt/GDP is going to be much less so government spending shouldn't be as high due to tax revenue from the GDP being enough to keep a balanced budget/pay for the interest on debt. Now, that same sovereign holding $15T debt is at 100% ratio. The interest paid annually is a much larger portion of the annual budget, so a deficit is much more likely. When budget deficits compound the debt compounds, interest increases and the debt increases. More funding is required so more debt is issued (Government Bonds). But now when outside investors see that a nation is holding a higher Debt/GDP ratio they are leery of a sovereign being able to collect enough tax revenue from the GDP in order to cover internal spending and interest on debt spending. So investors are only comfortable purchasing sovereign debt at higher rates (yields). When a bonds yield increases, the premium paid now decreases.

So if a sovereign was to issue $3.5B in bonds, the 50% debt/GDP nation would sell at lower interest rates because more people are interested due to the creditworthiness. They would sell less bonds at higher premiums meaning less would have to paid in interest at the maturation date. Now, for a government who is maintaining a higher Debt/GDP ratio, say 100%, the yields required for investors to invest would need to be higher due to the risk of, sometime down the road, a sovereign being unable to pay due to tax revenue from GDP being unable to fully cover interest on GDP and annual spending. So now investors are paying less premium a.k.a buying more bonds at higher yields so when the maturation date is reached that sovereign is forced to pay more interest. It's a cycle of debt that feeds upon itself all due to the deemed sustainability of a sovereign's ability to manage debt/budgets based on the sovereign's GDP and their debt (and thus interest annually) as a % of that GDP.

Some examples (Current and Historical):

Greece - As of my typing this, Greece is at a 165% Debt/GDP ratio. The 10YR Bond (The more or less basic bond issuance for any sovereign, the big kahuna) for Greek Debt right now is at 32%. Meaning 10YR Greek Debt purchased today, will net you a 32% profit payable by Greece in 2021 (assuming Greece as a nation exists...not likely). When the yield increases, the premium decreases. So for Greece, an issuance of 10YR Debt would require more bonds at lower premiums, payable in 10 years at higher yields. Unsustainable. There is a kind of maginot line for sovereign debt yields, and more often than not, the nations who cross this line are already north of the 100% Debt/GDP ratio. In 2007 the Greek 10YR was trading at a rate of 4.7%, when a 10YR trades above 7%, its basically the kiss of death. It is unlikely a government will come back without external bailout from that point. Greece crossed the 100% debt/GDP ratio in 2002 and never looked back.


United States - The only time in the last century the Debt/GDP ratio was above 100% was, yea you probably guessed it, World War II. The difference being the state of global affairs. There was more or less a reason for that ratio to happen. And then guess what, by 1950 it was down to 80%, by 1960 it was down to ~50%, by 1970 down to ~35-40%. Sustainability. Now though, we're increasing debt, bailing out banks, bailing out sovereigns, funding the IMF, fighting whatever wars we feel like starting. If we breach the 100% Debt/GDP ratio without coming back down to earth and cutting spending somewhere than historically (through examples like Greece, Portugal, Ireland and now Italy) investers (the largest holders of public debt) will want to pay smaller premiums and receive higher yields on debt, thus increasing annual interest paid on debt and further deteriorating the sustainability of the US. The current yield on US 10YR debt is just south of 2%. Compare that to Greece's 4.5% in 2007 (5 years after crossing 100% debt/GDP ratio) and 32% now (9 years after crossing). Slippery slope.

The end result of these cycles, which should happen in Greece in 2012, is the complete default and destruction of a sovereign's credit. Reduction below IG on bond issuances. Summation, Debt-GDP ratio is a method of deeming the sustainability of a nation's finances based on interest payments on debt compared to how much revenue a nation is bringing in from its GDP. And for another fun fact, this whole discussion is on Federal Government Debt alone.

Want to know how much total United States debt there is (Federal/State/Private)?

$54.5T

Want to know the interest paid this year alone on United States debt?

$3.7T

Bond markets are the sane cousin of the equity markets and paint you the full picture of sovereign/global economics.

[Kraftwerk]

Long story short, the United States is not God. We are fallible. Just, we also have the power of Satan behind us (The Fed) and the ability to devalue our currency until our debts are easier to pay off.....because our fiat is worth more or less the same as toilet paper due to printing. A fun result of printing and dovish monetary policy, hyper-inflation and the complete decimation of any wealth average citizens held (at least those without the foresight to buy physical PMs).

[Hasbinbad]

That was a somewhat enlightening and very informative post Kraft. Thank you.

I propose we cut spending to the military budget and raise taxes on the highest brackets. That way we can stop owing our souls to China etc., and afford to buy some more asphalt.

[Humerox]

In the end i dont think it would matter, to me the US dollar is make believe at this point. If they run out, they just print more and more and eventually abolish it altogether and start from zero which would mean the US will be the richest country.

Not by a long shot.

China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years.

The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

Like I been saying...better brush up on your Mandarin.

[Kraftwerk]

China is so misunderstood by so many people these days. People just picture this overflowing piggie bank when they hear anyone say China. The reality of the situation is that China is heading for a hard landing as their growth is slowing. Also, more likely than not, is that China has also been padding stats to make things seem A-Okay, when in reality the situation is akin to those of the western nations, but they're slightly better off.

The big issue though, is the Chinese real estate market. It's a bubble. A big bubble. And when it pops, hell will break loose over there.

[Kraftwerk]

That was a somewhat enlightening and very informative post Kraft. Thank you.

I propose we cut spending to the military budget and raise taxes on the highest brackets. That way we can stop owing our souls to China etc., and afford to buy some more asphalt.


I concur in that we need to cut spending. Military spending in 2011 is ~$700B. But you know what else we need to cut, permanently? Obamacare. Medicare/Medicaid is already ~$800B this year (Social security is a nice #2 at $730B) and the insanity that is healthcare for everyone will cost us an arm and a leg. Military cuts and a stop to socialist policies will help reduce our spending and maybe, MAYBE, get us back to a surplus, or at least less of a deficit annually. But you know my opinions on government policies - cut, cut, then cut some more.

I'm glad I could help you visualize the importance of Debt/GDP though, knowledge is power.

[Humerox]

The reality of the situation is that China is heading for a hard landing as their growth is slowing.

Even with a US-induced slowdown, China will still average a 5% economic increase annually.

The central date for China's GDP to overtake the US at market exchange rates is 2019 - a study of growth assumptions and analyses.
(http://ablog.typepad.com/keytrendsinglobalisation/2011/02/the-central-date-for-china.html)

The real estate bubble problem is interesting; China should overcome it without breaking a sweat. The strongest opposition argument is:

Regarding China’s urban population, the report forecasts that between 2011 and 2020 it will ‘increase by 26.1% or over 160 million people, while urban per head disposable incomes will increase by 2.6-fold to 51,310 RMB (about US$7,500 at current exchange rates).

Oh...answering the original point.

The US as we know it will cease to exist in less than 20 years. We'll probably become a collection of city-states.

[vaylorie]

Kraftwork called it right. The Military budget is about 58% of discretionary spending.... Discretionary spending accounts for less than 35% of total outlay. Mandatory spending is about 60% by now. Debt service makes up the rest ~5-6%.

Generally when talking about federal budgets people only seem to reference discretionary spending to avoid the entitlement programs that WILL crowd out all other spending given a long enough time frame.

Look at defense spending as the biggest category of discretionary spending... Assuming rough 2010 numbers, Defense is 58% of 35% of the total budget. Even if you did a 20% cut to defense (significant) you would be talking about a ~4% overall cut from annual spending. So gutting the military is a minor savings in the big picture especially contrasted to no mandatory spending reform. (not arguing that it couldn't use some cutting regardless)

Considering the source but understanding they are based on CBO & Public estimates... consider the below projections:

Federal Debt expectations as a percentage of GDP driven by mandatory programs like SS/Medicare/Medicade:
http://www.heritage.org/budgetchartbook/charts/2011/national-debt-skyrocket-850.jpg



Look at a more granular level and you see why the debt limit is such a hot topic this year...
http://www.heritage.org/budgetchartbook/charts/2011/increases-us-debt-limit-850.jpg



CBO Estimates that Entitlement spending based on current obligations will consume more 100% of annual tax revenues by 2049...
http://www.heritage.org/budgetchartbook/charts/2011/entitlements-historical-tax-levels-850.jpg



And of course, another reason why debt size matters apart from impacting credit re: 10yr bonds... (in $B)
http://www.heritage.org/BudgetChartBook/charts/2011/interest-spending-850.jpg


Good posts Kraft.

[vaylorie]

Also.. something that will probably garner disagreement but should be said re: raising the taxes on the highest end....

We already have a very progressive tax structure in which the top 10% of Income earners pay 70%+ of the revenue and bottom 50% (income between $0 and $33K) literally paid less than 3% overall.

Top 1% Income @ $380K+ (38% of total income taxes paid)
2%-5% Income @ $159K - $380K (20% of total income taxes paid)
6%-10% Income @ $113K - $159K (11% of total income taxes paid)
11%-25% Income @ $67K - $113K (16% of total income taxes paid)
26%-50% Income @ $33K - $66K (10% of total income taxes paid)
Bottom 50% Income @ < 3$3K (3% of total income taxes paid)

Again.. how much is enough is an opinion but 1) we already have a very progressive tax structure and 2) our problem is a spending problem and not a income problem.


http://freedomtorch.com/public/album_photo/58/9e/02/299bc_034a.png?c=a6aa

[vaylorie]

Last one...

This may better illustrate my last point as it relates to income % vs. tax %.

http://www.politicalmathblog.com/wp-content/uploads/2010/01/IncomeDistributionMaster1.png

[Hasbinbad]

Obamacare. Medicare/Medicaid
Dude. Your talk show agenda is cool and everything, but it doesn't deal with reality.

The fact of the matter is that hospitals in this country (as a microcosm of corporatism in this country) (and when I say hospitals, what I mean is pharmaceutical corporations, and their various subsidiaries) are virtually unregulated.

What that means is $15,000 toilets.

It's evident at every level.

The policy of the United States of America is to serve the needs of the corporate interests which operate within her borders. This is accomplished through lobbying, and is quite evident at every level, from flip-flopping presidents to corrupt local officials. In this system, where money is law, after all the lobbying middlemen and the kickbacks, it is impossible - even when they try to economize - for the hospital to buy a toilet for less than $10,000.

Wake the fuck up.

[Hasbinbad]

While we're posting so many fancy pictures, here's one.

http://i.imgur.com/6EbW6.jpg

Now shut the fuck up (vay).

[vaylorie]

HBB,
As I said, defense shouldn't be exempt from cuts and very likely needs reforms. Looking at defense as a focus point when it actually represents less than 15% of government spending while turning a blind eye to the 500 lb gorilla in the room of mandatory spending is foolish. Especially as there aren't ever-increasing obligations that are expected to grow tremendously in the coming years with defense given that congress evaluates it every year as part of a budget process.

[pickled_heretic]

http://upload.wikimedia.org/wikipedia/en/7/7a/U.S._Federal_Spending_-_FY_2007.png

less than 15%? naw dude. also it's a larger piece of the pie than discretionary spending fwiw.

[pickled_heretic]

if you're serious about spending cuts and your discussion does not discuss all three of the big line items, your efforts will be futile.

[Aadill]

and that's what the automatic cuts are going to do.

[pickled_heretic]

I concur in that we need to cut spending. Military spending in 2011 is ~$700B. But you know what else we need to cut, permanently? Obamacare. Medicare/Medicaid is already ~$800B this year (Social security is a nice #2 at $730B) and the insanity that is healthcare for everyone will cost us an arm and a leg. .

people keep repeating this, but seriously? even before we had 'obamacare' we were already spending more per capita on health care than any other industrialized nation in the world... if other nations can provide health care for everyone for less, why can't we?

[Aadill]

if other nations can provide health care for everyone for less, why can't we?

the problem that BOTH sides of the argument forget is that we have 310 million people in our country. You can't cover them all but you sure as fuck can't forget them either. Obamacare was supposed to help cover the forgotten at a slight expense to everyone else.. people object to caring about other people and that's where opposition comes from.

[pickled_heretic]

yes, we have 310 million people in our country, who cares? we also have a GDP to match that number.

[vaylorie]

Yeah,... Defense Spending is the problem...


(as a % of GDP)
http://www.heritage.org/budgetchartbook/charts/2011/defense-spending-entitlement-spending-problem-850.jpg

[pickled_heretic]

(as a % of GDP)

stopped reading, we're talking about federal budgets not GDP, thanks.

[pickled_heretic]

honestly you could not have posted a more asinine and irrelevant graph.

[Aadill]

vay, I think you're missing the overall point:

Frankly I don't mind defense spending when it's spent on defense. You know, like research (the same research that brought us superplastics, internet, etc), and general security (CIA, FBI) and even terrorist extraction/eradication... but just like every other department they are mismanaged.

Furthermore, all of those projected lines on your graph are pretty much following the same path as the ones on this graph:

http://i.imgur.com/c6De6.jpg



Coupled with this, what else would you expect? Some people want to remove all of this mandatory spending but still be covered under magic age-cutoff point of Medicaid/Medicare/Obamacare. The very people that are clamoring for the shutdown of the government in exchange for their private funds? It's self defeating, in my opinion.

http://i.imgur.com/wM2UR.jpg

[pickled_heretic]

vay is saying that mandatory spending should be on the table? absolutely, defense spending is under that "mandatory spending" umbrella. nobody is disagreeing that i can see.

[gloinz]

Also.. something that will probably garner disagreement but should be said re: raising the taxes on the highest end....

We already have a very progressive tax structure in which the top 10% of Income earners pay 70%+ of the revenue and bottom 50% (income between $0 and $33K) literally paid less than 3% overall.

Top 1% Income @ $380K+ (38% of total income taxes paid)
2%-5% Income @ $159K - $380K (20% of total income taxes paid)
6%-10% Income @ $113K - $159K (11% of total income taxes paid)
11%-25% Income @ $67K - $113K (16% of total income taxes paid)
26%-50% Income @ $33K - $66K (10% of total income taxes paid)
Bottom 50% Income @ < 3$3K (3% of total income taxes paid)

Again.. how much is enough is an opinion but 1) we already have a very progressive tax structure and 2) our problem is a spending problem and not a income problem.


http://freedomtorch.com/public/album_photo/58/9e/02/299bc_034a.png?c=a6aa

income has risen for the 1% far more then the other brackets have in the past 30 years thus they should be paying more

http://acivilamericandebate.files.wordpress.com/2011/04/growth-in-income-inequality1.jpg?w=640

not progressive enough

[vaylorie]

Look, the point is... if you want to have a discussion around federal spending and sustainability of US financials, then you have to look at mandatory spending programs. I'm not asserting that defense doesn't need cuts, but the common rhetoric that defense spending and not enough taxes on the wealthy is the root of the problem is a misnomer.

Mandatory spending needs REFORM (read: not cut completely) as does defense and health care. People frame the discussion as discretionary spending (calling out defense) is the only consideration here.

Defense spending is not under the mandatory spending umbrella based on government budget terminology. Congress has no ability to control mandatory spending during the normal budget process and only with new legislation to reign it in and provide reform.

[vaylorie]

stopped reading, we're talking about federal budgets not GDP, thanks.

GDP is a measuring stick that scales (roughly) with population increase. GDP is not the point here.

[vaylorie]

income has risen for the 1% far more then the other brackets have in the past 30 years thus they should be paying more

Great, the system is working as expected. The top 1% of income earners are paying 27% of the nations income tax.

A note here... We are talking in percentage and not dollars. They are paying both a higher percentage of their income and obviously much more in terms of actual dollars.


not progressive enough

As I said earlier.. this is an opinion point where everyone will have a thought.

[gloinz]

Look, the point is... if you want to have a discussion around federal spending and sustainability of US financials, then you have to look at mandatory spending programs. I'm not asserting that defense doesn't need cuts, but the common rhetoric that defense spending and not enough taxes on the wealthy is the root of the problem is a misnomer.

Mandatory spending needs REFORM (read: not cut completely) as does defense and health care. People frame the discussion as discretionary spending (calling out defense) is the only consideration here.

Defense spending is not under the mandatory spending umbrella based on government budget terminology. Congress has no ability to control mandatory spending during the normal budget process and only with new legislation to reign it in and provide reform.

Buffett has been talking about this for a while, but the debt ceiling negotiations have given him another chance to point out a fact: tax rates for the rich have been declining for over two decades. As rates have dropped, the super-rich have done quite well -- from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent of taxpayers.

http://acivilamericandebate.files.wordpress.com/2011/04/500px-marginalincometax_svg_5.png?w=640

tax the rich then see wut needs to be cut imo
the best years of our country when we created the interstate system went to space bla bla bla were when we taxed rich people proportionally to how much money they make in our country. problem

however with a global economy if you are getting taxed out your ass here you are likely to go somewhere else... so in the end we lose either way imo

[gloinz]

Great, the system is working as expected. The top 1% of income earners are paying 27% of the nations income tax.



not enough to keep our country floating when their income rises 250~% and they only are charged 10% more

[Aadill]

not enough to keep our country floating when their income rises 250~% and they only are charged 10% more

the simplest way to define the problem: as inflation and possible earnings increased the tax brackets did not follow.

If the top bracket doesn't go above $379,000 then any money over that is only taxed at 35%. With the right deductions that becomes next to nothing. No extra taxes paid on monies above $379,000 when there are people making $6+ mil a year. This goes for corporations as well as individuals.

At the low end, if you accidentally make a few more bucks a year ($34,500 vs $40,000, 15% vs 25% respectively) you can end up getting taxed at a much higher rate on those few thousand extra you made... Why isn't this happening at the top end? Because no one expected $12mil in stock options and $6-8mil in annual income.