Debt and GDP

[imoldernu]

In some way, I have to believe that our national debt has something to do with the economy, but this tired brain doesn't understand just how this works.

Can anyone explain the variances in national debt percent to the country's gross domestic product, and what, if anything, that has to do with financial stability?

Here's the debt website:
World Debt Clocks

Consider the comparative debt percents to the national debt (the percents in the right two columns) for these countries/

United States
China
Japan
Russia
Netherlands
Norway

Is this important?

 

[MichaelB]

Here's a link to a research paper by Reinhardt and Rogoff published 7 years ago that was very heavily discussed at the time. Growth in a Time of Debt

 

[imoldernu]

Here's a link to a research paper by Reinhardt and Rogoff published 7 years ago that was very heavily discussed at the time. Growth in a Time of Debt

Thanks for the link... It's still a little over my head, but I'm beginning to understand. In poking around for a more simple explanation, I found this 2014 piece in Forbes.

https://www.forbes.com/sites/jeffreydorfman/2014/07/12/forget-debt-as-a-percent-of-gdp-its-really-much-worse/#2d54e91f53ba

The article suggests linking the national debt to tax revenue. When we go to the United States part of the world Debt Clock, the relationship becomes clearer, and the percentages discussed in the article make more sense. Also, the vast differences between the numbers for the Netherlands re: debt to GDP, make more sense, when compared to the tax base.

It will be interesting to see if the coming budget plans will move the needle.

 

[exnavynuke]

Thanks for the link... It's still a little over my head, but I'm beginning to understand. In poking around for a more simple explanation, I found this 2014 piece in Forbes.

https://www.forbes.com/sites/jeffreydorfman/2014/07/12/forget-debt-as-a-percent-of-gdp-its-really-much-worse/#2d54e91f53ba

It will be interesting to see if the coming budget plans will move the needle.

I'm rarely a fan of "contrarian" experts. The author is not only "contrarian" on this issue relative to the general field (economists in general) but also dismisses even a "common sense" analysis of his approach on the subject.

Ignoring the massive short-comings in trying to equate national economics and finance with a household budget, there's a few other things he completely ignores.

Lets talk about his "major" point that a family's debt becomes problematic at more than 3x their annual income. Let's ignore the fact that the average mortgage balance is over 3x the average household income and yet most people manage to have no problem paying their mortgage and, instead, let's look at "why" that 3x number is being used.

Owing more than 3x your annual income is considered "problematic" because it results in the household having to spend a significant percentage of their annual income "servicing" that debt. In fact, for a "normal" family (we'll stick with the simplistic, if inaccurate, comparison the anti-debt people prefer to use for now), having that kind of debt would mean they're spending close to (or more than) 1/3rd of their gross income just servicing their debt. I think we can all agree with the author that spending over 1/3rd of income on debt is hard. So that family of 3 making $50k/year borrowed $314k to buy a house that costs them 36% of their gross pay each month ($1.500), and now they're feeling the burn of those payments impacting their ability to spend and/or save money elsewhere.

What if, however, that mortgage was at 0.75% interest with a 50 year loan term? How would that impact their finances? Well, now they're looking at a $300/month payment using up about 7% of their gross pay. Assuming they were going to live for 200 years, no one would tell a couple that paying 7% of their income for their residence was a financial problem because that's a very reasonable amount of their salary to be paying servicing their debt.

So, what are we paying to service our debt as a country? Well, in that guy's 2010 time-frame we spent ~19% servicing debt if we only use tax revenue to keep the "family" analogy going. By last year that had dropped to 13%. So, our debt last year was costing us about the same as if a family making the average income bought a $115k home at 4% interest on a 30 year loan. Does anyone here think there's a financial problem if a household making $50k/year has a $115k mortgage at 4% as their only debt??

There are plenty of things to worry about in the markets if one wants to speculate about potential problems, making payments on the national debt isn't one of them right now imo.

 

[imoldernu]

Thank you for your thoughtful analysis. Based on that, I see that the immediacy of concern for our US debt is far less than that of other countries.

I guess I shouldn't care about any of this because at our age, I only have to worry about 5 or six more years for myself and my DW, but looking at the Debt clock projecting unfunded liabilities, and the personal "per citizen" debt... I think of my grandchildren and what they may be facing.

In any case, the current debt limit will be an issue, come March 15, and it will be interesting to see how long it will take to settle the extension.

 

[DrRoy]

If you want to see what happens when a country's debt gets too large, have a look at Greece.

 

[gronk]

The reality is that we spent our kids future and they will be the ones who will ultimately have to pay the piper. So don't worry, be happy. As far as parental advice to them goes, that libertarian sage, George Carlin, said it best, "If you don't like the weather, move!"

 

[AllDone]

Here's a simple explanation about some of the most pervasive myths:
5 Things Most People Don't Understand About the National Debt | Money

Especially look at #3 in the list. Debt actually has a very positive function. The National debt was paid off briefly when Benjamin Harrison (IIRC) was president and it resulted in a recession.

Greece is in no way analogous to the US. The US controls its own currency, Greece does not. Greece also has a primitive banking system, few large businesses, a very low rate of tax collection, and an extremely generous retirement system for an aging population -- none of which apply to the US.

 

[swguy]

Here's another view, from a site I like a lot:

http://www.pragcap.com/the-us-government-is-not-16-trillion-in-the-hole/

Would it be better to have less debt? Probably. Is the National debt analogous to our personal debt, or that of a country like Greece? No. Managing spending would of course be a good goal for the US government, but in the past decade or so it's been an elusive one.

Sent from my SM-T550 using Early Retirement Forum mobile app

 

[Koolau]

I struggle to make sense of the debt (and deficit spending) since my economic education was rather limited. Most of the basic rules I learned about economic theory go out the window when you consider that the US can (at least for now) print all the money it wants AND influence the interest rates it will end up paying (at least for now.)

My thinking is that national debt should go up and down - just like mine did. Instead, the debt always goes up - never down (really.) Based on that, there seems to be a problem. Yet what I would think would happen (inflation) seems for the most part in check. I realize there are lots of other factors besides supply and demand (the trick of a central bank is that they control so many factors - not just one.)

It's my opinion that National Debt isn't a problem - until it is. When that is going to happen, I do not know. i just know that it WILL happen.

Now, if anyone wants to really worry, consider the hidden debt (off budget) of unfunded liabilities, SS, MC, Pensions, etc. etc etc. I've heard estimates as high as $100T or more for these "hidden" debts which will come due, each in its own time.

Naturally YMMV.

 

[GrayHare]

Historically when debt exceeds 100% of GDP that country's economy / currency collapses within a few decades. With a currency considered a "reserve" the US can probably survive a value greater than 100% but I hesitate to put that risk and burden on my children. Now, before interest rates rise much, is the time for the US to sell 50 or 100 year bonds, perhaps even consol bonds and lock in low rates for a long time.

 

[meierlde]

Historically when debt exceeds 100% of GDP that country's economy / currency collapses within a few decades. With a currency considered a "reserve" the US can probably survive a value greater than 100% but I hesitate to put that risk and burden on my children. Now, before interest rates rise much, is the time for the US to sell 50 or 100 year bonds, perhaps even consol bonds and lock in low rates for a long time.

The counter example is of course the UK the following chart shows debt to gdp peaked at 250% in 1815 after defeating Napolean, and 237% in 1947:Three Centuries Of UK National Debt for United Kingdom 1692-2016 - Central Government Local Authorities

Yet since 1688 the UK has not gone bust. Nor did the pound collapse although it has weakened. (Loosing a war is a great way force currency realignment see Germany for details, as Germany did it twice)

 

[Whisper66]

Just to add one other opinion.....seems to me that the debt has grown into a large problem, but not because the debt / GDP ratio has reached some magic breaking point. The real problem is that we are unable or unwilling to seriously address an ongoing, rapid growth of the debt. We allow huge yearly deficits without regard for the possible consequences and without any plan for how to control it or any consensus on what it should be limited to. We'll just debate how ok or not it is until something gives, then we'll all point fingers at the other guy. In that regard, it is no different than some of the problem family debt I have seen.

 

[GrayHare]

The counter example is of course the UK the following chart shows debt to gdp peaked at 250% in 1815 after defeating Napolean, and 237% in 1947:Three Centuries Of UK National Debt for United Kingdom 1692-2016 - Central Government Local Authorities

Yet since 1688 the UK has not gone bust. Nor did the pound collapse although it has weakened. (Loosing a war is a great way force currency realignment see Germany for details, as Germany did it twice)

As a reserve currency of that era, it's good to see the pound was able to survive that level of debt. It suggests the US can also, though I'd prefer to not test the limits.

"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy... " Elmer T. Peterson. The Daily Oklahoman (9 December 1951)

 

[Whisper66]

As a reserve currency of that era, it's good to see the pound was able to survive that level of debt. It suggests the US can also, though I'd prefer to not test the limits.

My guess is that the key to the US surviving high debt levels is the willingness of other countries to keep investing in our treasury notes and bonds. This helps fund our debt. Right now, we provide higher interest than other major players and we seem to be poised for an economic growth surge. That's a good position to be in and leads others to invest here. It would also be a prime time to plan on working down debt levels (not holding my breath on that one). When/if other major economies pick up their interest rates and growth rates, that's the time I'll be concerned, especially if their interest/growth rates meet or exceed the US's.

 

[GTFan]

As long as we can do stuff like QE that basically involves printing more money to retire debt, there is no real concern about the debt. And as the world's reserve currency ever since we got off of gold in 1971, I don't see that changing.

Gotta love the articles that try to equate our national debt and economics to household debt (thereby influencing folks to freak out about it). There is absolutely zero correlation between the two.

 

[Lsbcal]

...
Here's the debt website:
World Debt Clocks
...

This link is something that one should NOT look at. It emotionalizes a difficult issue. What I mean is that all those least significant digits flipping around, they are totally unnecessary and to me this shows a bias by the developer.

Anyway, I think a few of the links offered by others are worth a read. I read this one and actually understood it. Trouble is I always forget the arguments and just remember the underlying message.

Here's a simple explanation about some of the most pervasive myths:
5 Things Most People Don't Understand About the National Debt | Money
...

 

[VFK57]

There were a few "National Debt" discussions here already. I had never red or heard any of major economists who would state that we can repay $19 trillions without help from inflation. To service this Debt we will need larger and larger bite from our budget. Please note that China and Japan (largest foreign holders of our Debt) started to dump our Debt onto world financial markets. Foreign Governments Dump US Treasuries as Never Before, But Who the Heck is Buying Them? | Wolf Street
On the other hand our main economic competitor China made foreign currency exchange system to trade with many countries bypassing US$ and Euro what leads to less world US$ demand. We see slow but sure sign of inflation 2.5% Current US Inflation Rates: 2006-2017 | US Inflation Calculator without actual economic growth of healthy 3%. I think (I could be wrong) that this is the reason the Feds promise of 3 rates increases this year while our current GDP at 1.9% is still way lower from healthy 3%. Then can we afford more Debt and where it will come from (if not from the Feds creating new money)?

 

[explanade]

Remember when there used to be talk about "bond vigilantes"?

That started around 2009 or 2010, with warnings about high inflation and high interest rates.

Maybe some day?

 

[Hamlet]

My thinking is that national debt should go up and down - just like mine did. Instead, the debt always goes up - never down (really.) Based on that, there seems to be a problem. Yet what I would think would happen (inflation) seems for the most part in check. I realize there are lots of other factors besides supply and demand (the trick of a central bank is that they control so many factors - not just one.)

It's my opinion that National Debt isn't a problem - until it is. When that is going to happen, I do not know. i just know that it WILL happen.

The national debt does go up and down when you measure it against GDP, which is more meaningful than the nominal number. We had higher debt after WWII than we have today, because our economy was so much smaller. We grew our way out of that debt, even though the actual debt number went up over time.

We can add to the debt every year and it isn't a problem, provided that the economy grows a little faster than we add debt.

The problem we have is that we had a nasty recession that caused us to run up the debt at a much higher rate than normal for 5-6 years, and now that we are recovered we are still adding debt a little faster than the economy is growing rather than the reverse.

The difference between our current path and sustainable is probably only say 200 billion/year though. That really isn't an insurmountable thing to deal with if we had a functioning Congress. As it is though, it will probably end up turning into a real problem down the road.

Watch Japan as the canary in the coal mine- they are a decade or two ahead of us on the debt path, and their demographics are worse.

 

[Totoro]

The debt of a country cannot be compared to a household, and debt/GDP alone as a standalone metric is a bit tricky.

First, as long as countries issue debt in their own currency all debts will be serviceable. Just inflate it away. If not, welcome to South America.

Second, there is more than the debt. The Netherlands, mentioned, could pay off their debts pretty fast if they shift their taxation rules on pensions. Right now taxes on pension funds are due at pension date. If they shift it to be payable at the date of inlay, like many other countries, most of their national debt would be gone. The Netherlands has one of the largest (public and private) pension funds in the world. It's not the whole story with their massive mortgage debt, but still.

Third, the state may be poor but the citizens could be rich. That's the case with Belgium. Get some decent property taxes going and it will work out. Not popular, but it's an option there. Not so much in Germany, the USA is a bit murky since wealth is so skewed (big capital can run).

Nevertheless, there is a tendency that stability of a country goes down significantly one the debt/GDP ratio goes over 100%, which is why the IMF for instance wants countries to stay below that. It's not a certainty, but a pretty strong correlation.

Maybe a nice tidbit: in the Eurozone there is a stability and growth pact: all countries should stay below 60% debt/GDP and never have a deficit greater than 3%. It is weakly enforced but does give a guideline on what is acceptable as well. Note that Greece is so high because they cooked the books. In that same pact you can go over 60% (and even 100% if I recall) but have to work to get it under control.

The other metric puzzles me as I don't see the relevance that much. Who the public state owes the money too (domestic or not) isn't that important in my view, but I could be very wrong. As they say, if you owe enough it is not really your problem if things go wrong as it is the problem of the person doing the lending.

 

[meierlde]

As long as you control the printing press debt is not really a problem (that is Greece's problem it does not control the Euro printing press) If need be you see the relative value of your currency decline (international inflation), nor can you encourage inflation.

 

[dtbach]

I didn't like how the election went. But will admit that I like how the market has gone since then.

But how can I effect the National Debt? Zero. So I started to just give a "s__t" about anything. And now I feel better.

And it will have about the same effect on whatever happens in the next year or so.

Peace and Love

 

[Totoro]

As long as you control the printing press debt is not really a problem (that is Greece's problem it does not control the Euro printing press) If need be you see the relative value of your currency decline (international inflation), nor can you encourage inflation.

If the deficits run too high inflation will go rampant, instability will follow and you will be kicked out of the markets.

Ask many African countries, some of them still haven't learned.

The problem with Greece was that they were running a deficit of 15% of GDP and lying about it, with an unwillingness to reform and address rampant tax evasion. 50% (and more, depending how you look at it) of their debt got forgiven and still they can't pay, even though they could if all citizens paid their dues. A lot of the aid came because of them being in the Eurozone.

Yes, not being able to inflate away the problem was a very big handicap, but they were in big trouble regardless.

 

[VFK57]

As long as you control the printing press debt is not really a problem (that is Greece's problem it does not control the Euro printing press) If need be you see the relative value of your currency decline (international inflation), nor can you encourage inflation.

That is the point. Up until now the Feds would print as much as needed and entire world would take the US$ for trade, especially for oil purchases. We run very high trade deficit for years and would cover it with newly printed or electronically created money. Other countries noticed it too and started trade in their own currencies. Now we may see inflation rise even without money printing.