National Debt vs GDP - why does it matter?

[pickled_heretic]

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

[Galanteer]

http://www.nationmaster.com/graph/ec...my-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]

Originally Posted by Truth [You must be logged in to view images. Log in or Register.]

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]

Originally Posted by Hasbinbad [You must be logged in to view images. Log in or Register.]

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

Yeah you dont fuck with the wrong RL guild. [You must be logged in to view images. Log in or Register.]

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).