My parents lived through the Great Depression. Like millions of others they were severely impacted and the experience shaped the rest of their lives. In the case of my parents they always distrusted banks and they rarely used credit. Anyone who has ever lived through a financial crisis – and there have been many across the globe and years – were similarly impacted and if nothing else they personally understand the unintended effects of debt.
For the rest of us who have not shared these painful experiences the stories and warnings of parents and grandparents seem distant if not wrong. We live in modern times and have institutions that are regulated and surely it is okay if we expand our uses of credit. Our President recently promoted the idea of much more credit for college students despite the fact that college loans are not only risky but are already growing faster than a dandelion in a Phinney Ridge lawn in April.
Students really need those loans. People have to mortgage houses. You will need a bank loan to buy that Prius. Some of us use credit cards because we often spend more than we earn in a month. Governments prefer to expand public debt because of many worthy projects and because raising taxes seems cruel to citizens. No one disputes the omnipresence and productive aspects of debt. But like a good JD poured over an extra-large ice cube sitting in the right whisky glass, something might be necessary but that does not mean there isn’t a possibility of overdoing it.
When it comes to our personal lives, many of us understand all this. And that means we realize that there is a limit to how much we can borrow. If you have massive student loans then despite a decent job the payments on a new house are probably out of range. There are practical reasons for keeping debt at bay. For one thing you have to make the payments on the debt. The more of your income that goes to paying interest the less you can use for that new Fender Startocaster or the expensive bottle of Pappy Van Winkle. If debt goes high enough then maybe you will have to put off buying those yoga pants or a much needed mani-pedi (whatever that is).
Debt limits what you can afford to buy. But the issue of debt gets more dangerous than postponed gratification. What if you get laid off and cannot pay your mortgage? You may have to borrow even more money just to stay out of jail. This is a familiar story and we all know how painful it can be. With a smaller debt you might have endured a temporary job loss. Otherwise the options are not good. Look at current issues with Greece. There are no good answers for Greeks. Every option is painful.
With all these stories and realities around us, it is amazing to me that our government – the whole damn bunch of loonies – wants to subject us to unnecessary increasing financial jeopardy. Even Alex Trabek might balk at this kind of jeopardy.
What I am referring to is the current discussion about the US budget for 2016. Virtually no one in government represents the financial stability of our country. All branches and both parties have given the secret handshake and agreed that it would be silly to reduce the size of the US debt. Some Democrats have signaled they want to spend significantly more – particularly on Social Security Benefits. One fraternity of Republicans wants more spending on security and national defense. Another wants lower tax rates and tax reform. But notice that none of them are seriously standing up for lower debt. Debt be damned or at least ignored.
Our government representatives take these positions knowing a few things. First they know that the USA is well into the sixth year of an economic recovery and expansion – one that has been lackluster at best. It is also one that will be followed by a recession. I don’t have a good gauge for exactly when recessions come, but surely within the next few years one will come. So despite today's higher incomes they don’t want to pay down debt. If not now, then when? During the next recession? I think not!
Second they know that national debt is much higher than normal. Okay – normal is not easy to define. But let’s face it – our national debt used to be about 35% of the size of GDP. Now it is twice that. Third, despite spending caps and tax increases on the rich, future plans are for the national debt to get even higher – more like 80% of GDP.
Hey Larry you are eating more popcorn than normal. What is normal anyway? Maybe 80% of GDP is just fine. So let’s talk about normal. The gross debt of the US is a big number but more meaningful for economic analysis is the debt held by the public.
The table below shows that we raised the debt dramatically during our last recession – notice the debt went up by 140% (from $5 to $12 trillion) between 2007 and 2014. But that isn’t apparently enough. From $12 trillion they plan another $8 trillion to reach more than $21 trillion. By 2025 the debt will be four times what it was in humble 2007.
One benchmark for normal comes from our European neighbors. While some European countries are notable for large government debts (e.g. Greece, Italy, Belgium) countries that adopted the euro currency agreed to keep their net debts to less than 60% of GDP. That’s 19 countries who believe that there should be limits to debt. Most of them are usually well below the 60% figure.
So the US is well above most European countries. But the stupidity doesn’t end there. The Congressional Budget Office estimates how much more the debt will grow because of recent policy suggestions by both parties. Conservatively, the debt in 2025 could easily be another $5 trillion higher if government goes along with some of these ideas.
So – is a national debt of 80% of GDP too high? Will I be just fine if I add about 100 pounds of cheeseburger-induced fat to my belly? Maybe maybe not. But clearly the reasonable thing is to not go in that direction. Getting back to what we usually consider normal would create a lot less risk. No one wants another financial crisis tomorrow.
Debt Held by the Public
Year In Trillions % of GDP
2007 5.0 36.3*
2014 12.0 74.1
2025 20.1 77.1
*Note – between 1973 and 2007 the debt ranged anywhere from 24% (1974) to 49% (1995).