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Living in the Shadow of a Volcano: The US National Debt in Perspective

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Every once in a while, a mainstream news outlet publishes a piece about the national debt. Here and there, politicians trot out the surging debt as a talking point to make some political hay. Now and then, an economist will wave the red flag. But by-and-large, the national debt just kind of looms over us.

We’ve gotten used to the shadow it casts, and we generally don’t give it much thought. It’s kind of like people living at the foot of a volcano. They know it’s there. It might cause some low-level anxiety. But they really don’t pay much attention to it – until it erupts.

So, just how bad is the national debt? We all know it’s pretty bad. But would you believe it’s actually worse than you probably think?

The headline number is operating debt. It currently stands at $20.5 trillion. It spiked $608 billion in just eight short weeks after Pres. Trump signed a bill raising the debt ceiling limit for the next three months in September. And Trump wants to do away with the debt ceiling altogether.

The national debt is currently over 105% of total GDP. That’s the highest level in history except for a two-year spike at the end of World War II.

As Dan Kurz at DK Analytics noted in a recent report, “The surging operating debt is a reflection of a growing deficit since the dollar gold standard was terminated in August 1971 and would have been impossible had the federal government upheld fidelity to the Constitution. That same Constitution made only gold and silver legal tender for state commerce at a time when the federal government was extremely small with very limited powers. Most were reserved for states and the people.”

But the US operating debt is only the tip of the iceberg. You also have to consider state and local government debt. That adds another $3 trillion to the total. That brings aggregate operating debt to $23.5 trillion and growing.

In the immortal words of Billy Mays, “But wait there’s more.”

As Kurz points out, the operating debt pales in comparison to federal unfunded liabilities.

This is before taking into account the huge, unfunded, federal level off-balance sheet social security and Medicare entitlement commitments, which amount to $46.7 trillion when discounted back over the next 75 years, and to over $210 trillion without a 75-year cut-off. Needless to say, the secular federal government entitlement spending pressure cooker will lead to either huge, politically unpopular entitlement cutbacks, or to QE-based ‘inflationary cutbacks.’ In any event, both today’s large governmental operating deficits, as well as the massive reported operating debts, are ‘non-GAAP slivers of reality;’ no public company could report this way.”

It’s easy to get lost in the data. After a while, it’s just a bunch of meaningless numbers. We sense the doom, but we don’t really grasp on what it all means. Again, it’s kind of like living in the shadow of a volcano. It’s just a big mountain until the rumblings start and smoke begins to spew out the top.

All of this debt will have a real impact on the economy in the future.

For one thing, the massive national debt puts the Federal Reserve in a difficult position. It wants to “normalize” interest rates. But doing so would crush the US budget under interest payments. Analysts have calculated that if the interest rate on Treasury debt stood at 6.2% – their level in 2000 – the annual interest payment on the current debt would nearly triple to $1.3 trillion annually.

Then there is the impact of debt on economic growth. Studies had shown that GDP growth decreases by an average of about 30% when government debt exceeds 90% of an economy. Remember,  US debt already stands at 105% of GDP. Ever since the US national debt exceeded 90% of GDP in 2010, inflation-adjusted average GDP growth has been 33% below the average from 1960–2009, a period that included eight recessions.

It’s easy to get complacent. It’s easy to just pretend the debt isn’t there. But eventually, it is going to erupt.

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