Sunday, November 11, 2012

National Debt Near 100% GDP? This Issue Explained

By Ben Porter

We hear frequently that the national debt is exceeding GDP, but what does that mean? What the heck is GDP and why do we care that it is being overtaken by the national debt? Let's start at the beginning:

What is GDP?

"The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy." (Investopedia)

In other words, if you took the value of all the goods and services produced in America (all the work done by people) and added it up you'd get to GDP.

So what does it mean then if the National Debt exceeds GDP?

It means that we as a country owe more money than we can produce in an entire year. If you confiscated every single dollar, you could not even pay off the debt. Any reasonable person can see that simply "taxing the rich" and making them pay "their fair share" is NOT going to fix this problem. There is only one way to fix it: Start being fiscally responsible. This includes reducing spending to amounts that do not exceed the revenue brought in through taxes.

The principles of sound fiscal management scale very well from the household level to the national level. In your own household, you can only borrow so much before you run out of money. We all know that taking out the credit card and racking it up with debt is a bad idea for a household. It takes a balanced budget, hard work, and sacrifice to dig a family out of a hole of debt. The Federal government is no different when it comes to paying off debt. At some point we will not just have to balance the budget (meaning we use our income to pay for all of our expenses, instead of borrowing money to pay for them), we will have to run surpluses (meaning we have extra income left over after paying the expenses, and this extra money goes to paying down the debt). If we can't even balance the budget now, how are we going to pay it down?

The facts:

George Bush racked up obscene amounts of debt for us. Barack Obama was right to call this "unpatriotic." However, once inaugurated, Barack Obama racked up debt even faster than George Bush, at a pace completely unprecedented in our country's 236-year history.

What makes the debt carried by the federal government even more dangerous though, is their ability to print money. They can and are printing money to pay off the debt. How does that work? Well, each dollar they print lowers the overall value of every other dollar already in existence.

Think of it this way: If magic money fairies came and instantly doubled the value of your bank account, you'd have twice as much money. You could go out and spend your money on goods and services, and you'd get essentially double the value compared to what you would have gotten without the fairies. Now, imagine that the fairies doubled everyone's money. At first, you and everyone else would go out and buy everything you wanted, receiving approximately double the value that you would have. Quickly, all the stores would run out of stock and there'd be no goods available for purchase.

Once the stores realized what was going on, they would double their prices so that everything would be back to normal. In economics, this would be supply equaling demand (an explanation of supply v. demand is forthcoming in another article).

The net effect of this is that while everyone has twice as much money, but goods are twice as expensive. So, each dollar has only half the spending power that it did before the fairies showed up. Now, money fairies don't exist in the form we all wish they did, but they do exist when you have the power to print money. This is something the Federal Government can do, through an entity called the Federal Reserve Bank, or the Fed for short.

The Fed can and does print money as part of its monetary policy. As part of their approach to dealing with our massive and out-of-control debt, the Fed has been printing money under a program called "quantitative easing." This means that every dollar of debt will cost the government less to pay off, because each dollar is worth less. Using this strategy, the government has an easier time paying down debt.

But what else happens? You can't get something for nothing right?

Yes, that's correct. The effect of this is the same for you as it would be if the money fairies doubled everyone's money except yours. Inflation rises because of the money printing, and every person who holds US dollars feels the effect of this "hidden tax" when their money becomes worth less, or has less buying power. It is the opinion of the author that this is one of the most evil taxes that can be levied on a people by its government. It is practically invisible and very hard to detect, and it hits the poor harder than any other tax because there is nothing the average person can do to avoid it. The rich can shift their investments into assets that hold value through inflation, but the poor and middle class cannot usually do that. Also, wages never keep up with inflation, and most of the 99% rely on wages for their income.

So paying down debt is hard. Why don't we just procrastinate paying it off?

Quite a tempting thought, but not a good idea. Again, think about a personal household. Your debt continues to increase, even though you aren't adding to it, because interest accumulates and raises the balance. So not paying down the debt adds to the debt with no action required. So the short answer is that it wastes even more money when it isn't paid off! Each day that we carry forward our debt we are throwing away money, and it is the US citizen who suffers, as has been previously shown.

We must demand fiscal responsibility.

Regardless of party affiliation, politicians are loud and proud in claiming their allegiance to fiscal responsibility. Once they have power however, they do nothing to address the problem. Why? Because it is politically unpopular in practice, despite its popularity in rhetorical form. It is unpopular because there are really only two ways to address the debt. you must either raise taxes (obviously not popular, who wants higher taxes?), or cut spending (also not popular).

Cut spending to what?

You would be shocked to know how much the federal government pays for. Cutting spending will hurt someone with voting rights, and this is why no politician wants to do it. Unfortunately, this self-serving and unpatriotic unwillingness to cut spending is destroying our country by watering down our wealth. To put it into perspective, our debt is about 16 trillion dollars. 16 trillion is a high enough number that most people can't visualize it. Think of it this way. If you took every person in the country and demanded they pay just their portion of the debt (divided as equal shares among everyone), every person would have to pay approximately $53,333. Do you have that much money laying around to hand to the government? I sure don't! This is real money! We, as a country, owe more than 53 thousand dollars per person.

What if we can't pay it off?

Well, our debt holders will take their money from somewhere, whether it is inflating our currency (the fed printing money) or taking our assets (such as our land). Also, we may not be able to borrow money in the future, which means that in times of recession when we need a little help, it won't be there. Again, think of a family household. How does the inability to get a loan affect you?

What can we do?

We need to support politicians who are serious about cutting the debt. When we get closer to an election, we will take a look at politicians and their records for cutting spending and reducing debt. We can't take them at their words anymore, we must examine their actual records.

In the mean time, start spreading the word! You would not believe how many people are clueless about our National debt. We have got to make this common knowledge so that people can vote as informed citizens. Until this happens, we'll continue to get more of the same.

Direct link: National Debt Near 100% GDP? This Issue Explained

2 comments:

  1. So true. Unless some major changes are made, every man, woman, and child in the U.S. is going to suffer for irresponsible spending. I think, however, that a lot of the blame lies with the american people.

    As Ben says, in practice, cutting government spending is very unpopular. That is because everyone is in favor of spending less as long as their favorite program isn't the one that gets cut. I think until the American people as a whole are willing to give away discretionary programs they like, politicians will continue to please the public by not cutting those programs.

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  2. For some more information about our current debt, and to see a good comparison of our debt to other countries, check out this page: http://www.investinganswers.com/education/global-economic-crisis/10-countries-drowning-government-debt-greece-4385.

    I should probably warn you though, it isn't pretty.

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