How much debt is too much?

Last Tuesday’s primaries revealed what everyone suspected – voters are angry and ready to “throw the bums out.” Democrats might well ask, “Where was the anger when George W. Bush was spending billions and digger us deeper into a hole?” It’s a darn good question. If voters had started paying attention to Washington’s spendthrift ways years ago, we wouldn’t be in the mess we are in now.

In last week’s column, I looked at our currently projected deficit as a percentage of GDP (gross domestic product – the total value of all goods and services produced by a country in one year). At 11%, we are well above the 3-4% economists believe is a safe level of deficit spending. This week I want to consider our federal debt as a percentage of GDP. As of May 20, our debt, the accumulation of all past deficits, was a whopping $12,990,930,267,939 and growing at a rate of $4.13 billion a DAY! Just go to www.usdebtclock.org and watch the numbers roll – it’ll scare your socks off.

Our debt now stands at 90% of GDP. The IMF (International Monetary Fund) projects the ratio to be over 100% by 2015. I don’t have to tell you that is high, but the real question is, how much debt is too much? After hours of exhaustive research, I finally found the answer – nobody really knows. The best answer I found was “the amount of debt we will have if we continue spending the way we are now.”

The European Union requires states to have a debt-to-GDP ratio of 60% or less to gain entry to the union. It’s disconcerting to know the U.S. would not qualify. In fact, most European nations are above the limit as well, and the EU is being criticized for not enforcing its own rules. EU member states now have an average debt-to-GDP ratio of 80%, and worries about European debt are having a negative effect on U.S. markets.

Greece has been living way beyond its means for years with generous social programs and benefits. Its current deficit is 14% of GDP, compared to our 11%, and its debt-to-GDP ratio is 115%. In order to get a “bail-out” from the EU, they have been forced to make dramatic cuts to government programs, resulting in deadly riots in the streets of Athens. Is this our future? I hope not, but human nature being what it is, I wouldn’t be surprised.

According to a recent study by Reinhart and Rogoff, authors of This Time is Different: Eight Centuries of Financial Follies, whenever a country’s debt exceeds 90% of GDP, there is a significant slow-down in economic growth, which leads to even more deficit spending. It’s easy to see how things can quickly spiral out of control at that point.

Historically, our current debt-to-GDP ratio is not an all-time high. That occurred in 1946, immediately following WWII. Wars are very expensive and normally result in borrowing – remember the push to buy those war bonds? But once the war ended, the debt was gradually brought down to just 31% in 1981. Then things went crazy. The ratio rose to over 50% during the Reagan years, when a Republican president cut taxes and a Democratic Congress went on a spending spree.

What is really scary is the rate at which our debt is growing. It took the U.S. from its founding until 1996 to accumulate its first 5 trillion in debt. It took only twelve more years to acquire another 5 trillion. Projections now show we will accumulate our third 5 trillion in the years from 2008 – 2011. Wow.

So how will all this affect us? What are the results of so much debt? Next week…