US National Debt Will Exceed GDP by 2012

In my last piece regarding the US financial situation, “Obama-Bernanke ‘Economic Recovery’ is Actually Dangerous Bubble”, I gave a rather dire, non-sugarcoated forecast of what the future holds for the US economy if the nation’s leaders don’t change direction extremely soon in a variety of areas (which they are still showing absolutely no intention of doing). One of the very worst consequences of US leaders’ fiscal recklessness is that soon the US national debt will exceed the nation’s GDP, imperiling its ability to continue receiving foreign loans at low interest rates, which is something that it has come to depend on. While I warned that it would be “only a matter of time” before this happened, I was unfortunately unable to say exactly how long this “matter of time” would be. That was because President Barack Obama had not yet released his fiscal year 2011 budget[1], including his advisors’ projections of the nation’s financial situation for this year and years to come. Now that he has, it is very clear from perusing it that the situation is, to put it bluntly, even worse than I feared. Obama’s FY 2011 budget is projected to leave a record-breaking deficit of $1.56 trillion, $0.15 trillion greater than his prior FY 2010 budget which itself is projected to leave a record-breaking deficit of $1.41 trillion. Furthermore, the budget for the fiscal year thereafter, FY 2012, is projected to leave a deficit of $1.27 trillion. These deficits together, combined with prior high debt and the ongoing global recession, will according to the projections of the President’s own economic advisors, push the national debt past 100% of GDP in FY 2012.

Once again, this has not happened to the United States in any other time in its history besides World War II. Even back then, the debt-to-GDP ratio remained above 100% for only 3 fiscal years before coming back down below 100% in FY 1948, whereas now it is projected that the debt-to-GDP ratio will stay above 100% for 8 fiscal years after reaching that level in FY 2012, and will stay above 100% indefinitely as projections end in FY 2020 with debt-to-GDP ratio at nearly 107% and climbing.[2] Back in the immediate post-WWII era, it was possible to get the debt back down to less than 100% of GDP in 3 fiscal years because it was really only a matter of paying off a war debt, and the government’s size and scope were much smaller then than they are now, thus the cost was much less per year than it is today. Some people, most notably libertarians and “Ron Paulians” indeed do posit drastically cutting down the current size of the government as the solution to our present predicament, but this is not as easy as it seems. For example, Greece (whose national debt is forecast to reach 120% of GDP by the end of this year) has already been forced to do that, but this has led to much civil unrest as so many of the numerous interest groups that expect their share of the pie each year are now coming up empty-handed. Now, Greece is indeed infamous for the sheer number of interest groups there tugging the government this-way-and-that for what they want, and this has certainly compounded the problem, but then again so is the United States, and it is very likely that our own interest groups, when they begin to be denied their share of the pie, will start acting in the same way as the Greek interest groups, including staging massive general strikes and other such events, and it may even unfortunately lead to more serious civil unrest as is happening currently in Greece.[3][4]
Material Consequences of Fiscal Recklessness
A recent study done by economists Carmen Reinhart and Kenneth Rogoff (link here)[5] indicates that when nations reach a level of 90% debt-to-GDP ratio, they really start to lose their ability to grow their way out of debt, and instead have to rely upon more extreme measures, such as hyperinflation or currency devaluation, in order to solve their debt problems.[6][7] When the ratio climbs from 90% to over 100% and beyond, the problems can only get worse, both from a psychological standpoint and a reality standpoint, and the devaluation or hyperinflation that will eventually have to happen will only be all the more extreme, and the ensuing civil strife discussed in the preceding paragraph will be all the worse. So the option is clearly between a lot of pain now, and catastrophic disaster later. It is quite regrettable that America’s leaders are fecklessly sending it hurtling toward the second option.[8]
[1]The US Government’s fiscal years start on October 1st and end on September 30th. For example, FY 2009 started on October 1st, 2008 and ended on September 30th, 2009.
[2]These numbers could (and probably will) become even worse as there is a strong aftershock to this financial crisis waiting in the wings in commercial real estate. A February report by the Congressional Oversight Panel states that about $1.4 trillion worth of commercial real estate loans are due in the 2011-2014 period (a significant portion of these are loans for real estate that was built up during the aformentioned 2005-2007 housing bubble height) and nearly half of this money is wrapped up in loans that are currently “underwater”, meaning that the lendee owes more than the property is worth. It is estimated that this situation will result in about $300 billion worth of losses, which sounds relatively modest on its own compared to the numbers we’ve seen, but the problem is that these losses will not occur in a vacuum. Much of this money was loaned out by smaller and medium size banks which were not given the “stress tests” (to measure their ability to withstand another crisis) like the bigger banks were in the aftermath of the Lehman collapse. While this situation is not likely to (by itself) cause another Lehman-style collapse, it will nontheless wipe out many of these smaller and medium size banks, adding to the crisis that we are already in much more than simply having $300 billion disappear.
[3]It should be noted additionally that in Greece, which is in an even worse financial situation than the United States, even the big austerity cuts that are already causing all these strikes and civil unrest are only able to reduce the deficit a paltry amount from 12.7% of GDP in calendar year 2009 to a projected 8.7% of GDP in CY 2010. This isn’t enough to stop Greece, which was already at a 112.6% debt-to-GDP ratio at the end of CY 2009, from reaching a whopping estimated 120% debt-to-GDP ratio by the end of CY 2010. But the problem is that if Greece were to cut significantly more off of its government budget, because it’s come to rely so much on its public sector, it could throw the country into a depression and cause so much financial chaos (not to mention civil unrest) that it would defeat the purpose of any cuts in the first place. Greece is in a truly terrible situation, and it seems the only real way out is either an EU bailout or an IMF (International Monetary Fund) bailout, since devaluation or hyperinflation are not options as it uses the Euro. If an IMF bailout happens, it will be extremely embarrassing for the EU in many ways, so most EU elites seem to be gravitating toward the first option, which is going to anger a lot of EU voters who don’t want to be held responsible for Greece’s problems. But this leaves open the question of Spain and Italy, which seem also to be headed in Greece’s direction with regards to their finances. These countries have much larger economies than Greece, so it’s going to be very hard, if not impossible, for the EU to bail them out if they end up in Greece’s position. Even worse, bailing out Greece will send a message to these countries’ leaders that they don’t need to get their financial houses in order now while they still can, so they’ll keep heading in Greece’s direction rather than cleaning up their act, so there’ll be an even bigger problem only a few years down the road. If that ends up happening, the EU will have to bail them out, as the IMF doesn’t have the assets to bail them out, and that will be a big strain on the EU as many other major EU nations, in other words the ones that would be expected to foot the bill such as Germany, are starting to develop debt problems of their own.
[4]A critic might accuse me here of “comparing the current financial situation in the United States to the one in Greece.” Rest assured that I am doing no such thing, and I am well aware that the United States is the world’s largest economy, and can print its own money (the US dollar), which is also the world’s reserve currency, none of which is true in the case of Greece which is a smaller economy, and uses the Euro which it cannot print. But what people often miss is that once things start getting really bad here in the USA with the debt (and with other things), to the point where even our size and the fact that we hold the world’s reserve currency cannot save us, there is simply no safety net. Greece, as well as numerous other countries which have had weak or failing economies in this crisis such as Iceland and Ukraine, all have had either EU or IMF bailouts available to them should they need it, and some of them have indeed used that option. However, if US national debt were to somehow become unmanagable, to the point where we couldn’t tax our way out, couldn’t export our way out, there is no bailout machine in the entire world large enough to save us. None. Not the IMF, as it only carries $500 billion on hand, which is enough to bail out Greece, Iceland, or Ukraine, but is peanuts when it comes to US debt numbers. Not even China or the EU. China’s economy, even though that nation gets a lot of press as the “emerging superpower”, is simply not large enough as it is less than a third the size of ours. As for the EU, its economy is about 20% larger than ours, but the EU has its own debt problems, so if the EU attempted to bail out the US, it would simply transfer the problem over from the US to the EU. So the only option for the US at that point would be a “stealth default” (either that or an outright default, but a “stealth default” is much more likely to be what actually happens), which means having the Federal Reserve simply print whatever number of dollars is necessary to bring the debt back down to a managable level. The problem here is that this will not only seriously devalue dollars held by citizens here, but also the dollar assets of many nations all around the world who hold the dollar on account of it being the world’s reserve currency. This will cause problems all around the world, and may even push nations which were already on the brink totally over the edge.
[5]For those interested, investment columnist Jim Jubak has written an article on the Reinhart-Rogoff study that makes it and its real-world ramifications easier to understand for the layman. His article can be found here: http://www.moneyshow.com/investing/Jubak_Blog.asp?aid=Jubak_blog-18642
[6]The United States will cross the crucial 90% debt-to-GDP mark at the end of this fiscal year, FY 2010, which ends on September 30th of this year, reaching an estimated 94.1% debt-to-GDP ratio.
[7]Once again, an important exception to this rule is the case of the United States in the immediate post-WWII era. This was an exception because back then, the fact that the national debt rose above 90% of GDP (and indeed above 100% of GDP shortly thereafter) was caused almost solely by a war debt, rather than a much more fundamental set of problems with the system as is the case today.
[8]Again, rest assured that I am not simply a “doomsayer” that is preaching that “economic collapse” is going to happen tomorrow. What I am saying though is that even the United States, the world’s most powerful economy, has its limits, and governments controlled by both major parties (as well as the Federal Reserve controlled by various chairmen) have been pushing us farther and farther towards those limits for a long time now, and given our current situation, if nothing changes, it will eventually hit the wall, not tomorrow, not even next year, but in ten years, or fifteen years at the most, if this path does not change it will hit the wall. Right now we are seeing but the opening stages. (Perhaps the early-2000′s tech bubble burst, given that the loose Fed monetary policy that was meant to “repair” the burst created a fake bull market and helped build up the housing bubble, was the opening stages to the opening stages.) There is still time to turn things around and prevent the “closing stages” from happening, but if nothing is done, then they will happen given our current course, and it’s going to be a lot worse than this current crisis. That’s not a “doomsayer” prediction. That’s just common sense.
[9]Here are the numerical values for the US debt-vs-GDP chart.
Fiscal Year–GDP–National Debt–Debt to GDP ratio–as a %
| 2009 | 14237 | 11850 | 0.832338 | 83.23383 | ||||||
| 2010 | 14624 | 13760 | 0.940919 | 94.0919 | ||||||
| 2011 | 15299 | 15117 | 0.988 | 98.81 | ||||||
| 2012 | 16203 | 16308 | 1.00648 | 100.648 | ||||||
| 2013 | 17182 | 17426 | 1.014201 | 101.4201 | ||||||
| 2014 | 18193 | 18505 | 1.017149 | 101.7149 | ||||||
| 2015 | 19190 | 19656 | 1.024283 | 102.4283 | ||||||
| 2016 | 20163 | 20809 | 1.032039 | 103.2039 | ||||||
| 2017 | 21136 | 21984 | 1.040121 | 104.0121 | ||||||
| 2018 | 22087 | 23171 | 1.049079 | 104.9079 | ||||||
| 2019 | 23065 | 24424 | 1.05892 | 105.892 | ||||||
| 2020 | 24067 | 25751 | 1.069971 | 106.9971 |
Note: National debt and GDP numbers are in billions of dollars.
Again, these numbers are all from the President’s FY 2011 budget except for the debt-to-GDP ratios which I calculated myself based on the numbers calculated by the President’s economic advisors.

If you had paper money worth 