There is more nonsense written about government debt than almost any other subject. That's because almost no one understands it. You hear politicians say we're leaving the debt for our kids to pay. Well the kids won't pay it either. When will it get paid?? NEVER!! And it doesn't matter. What does matter is whether your debt grows faster than your economy. If the debt continues to mount at a faster rate than the economy at some point the world won't buy our bonds and rates will skyrocket. This is what is going on in Greece and to a lesser extent Italy and Spain. We need our economy to grow faster than the debt. And we need to reduce the defict. This is ALREADY happening. The deficit has been reduced by a third. It will go down some more next year. We need to go back to Clinton era tax rates. We ended that era with a surplus and we can at least reduce the deficit to manageable levels in this era.
Walt, I agree that the budget deficit / national debt is an extremely important issue, but you should stop bumping this thread because it contains an important error of fact:
"We need our economy to grow faster than the debt. And we need to reduce the defict. This is ALREADY happening."
As I think we might have agreed somewhere earlier on this thread, our GDP is growing by an average of about $300 billion per year (that's a 2% GDP growth rate multiplied by $15 trillion, 2011's GDP). However, we're adding $1.2 trillion per year to the national debt.
Therefore, our economy's NOT growing faster than our debt, or even anywhere near as fast, by a total of $300 billion annual economic growth vs. $1200 billion annual debt growth.
We're stealing our kids money, and that's not OK.
@Walt, it's true that Japan has a 200% Debt to GDP ratio, but the reason they're allowed that leeway is a consistent track record of disciplined budgeting when necessary. They went the huge loans route in the 90's when their economy was stagnant vs. roaring US and European economies, but the very second the lenders said "maybe you should balance your budget now," they did.
They've shown an ability to make tough decisions on tax hikes and spending cuts and the lenders have rewarded them for that. We, however, have not. Instead, our messy, divisive, gridlocked political process concerning the budget and tax policy means that lenders are more likely to view us through the same prism they view the European countries, who are like that, too.
That means we should fear the 5% interest the Italians have to pay at a 107% Debt to GDP ratio, the 7.5% interest the Portugese have to pay at 120% Debt to GDP, and let's all hope we never have to face the music of Greece's essentially bankrupt country, at 170%.
Sorry Chris but Japan has had HUGE deficits and debt levels for YEARS. As long as a country has wealth and a strong cental bank as lender of last resort they can run much higher deficits and the debt can go much higher. Slow growth also calms the bond market about inflation. S@P agreed with you and downgraded U.S. debt. Bond yields went LOWER in response. Read Paul Krugman's book END THIS DEPRESSION NOW. I don't agree with him that we're in a depression but he does show how slow growth allows higher debt levels.
Walrath, good points regarding the federal debt!
But I just want to congratulate you for owning XIN, its really taking off, and its about time, because the companies fundamentals are superb.......good luck.
Walt, you're talking about the Debt to GDP ratio, but you're not appreciating the risks and how close to the cliff we really are. You've also made the mistake of assuming that GDP growth (averaging $500 billion per yr over the last 10 years) is anywhere close to our 2012 (and inevitably, 2013's) federal budget deficit of $1.2 trillion.
Our 2011 GDP was $15 trillion. Our 2011 national debt was $15 trillion. So, our 2011 Debt to GDP Ratio was 100%. That figure's climbed a couple percent this year. But let's look forward four years.
Over the last 10 years, our GDP has grown at an average rate of about $500 billion per year. Assuming that remains constant, and also assuming that our next four deficits are "only" $1 trillion -- and I'm sure they'll be higher -- that will give us a Debt to GDP ration of 118% four years from now ($20T divided by $17T).
The jump from 100% to 118% might not sound like that big a deal until we look at the borrowing rates of some countries in that same zone:
1. In borderline basket case Italy, which has a debt to GDP ratio of 107%, they have to pay 5% interest to borrow money. We currently borrow at less than 2%, and next year's interest will still total $450 billion. If we have to increase our borrowing to 5%, that number jumps by $50 billion per year.
2. But we won't be at Italy's 107%, we'll be closer to complete basket case Portugal, with a Debt to GDP ratio of 120%. Their rate of borrowing is at more than 7.5%. So, the additional annual borrowing of $1 trillion will add $75 billion per year to the $450 billion we already pay in interest on our debt.
We're about 6 inches from the cliff of jumping from 2% borrowing for our debt to 7.5% borrowing, but voters don't realize it, so politicians don't talk about it.
It's our country's dirty little secret everybody wants to ignore instead of fix.