Revisiting the National Debt Discussion
Key Points – Revisiting the National Debt Discussion
- US Debt Clock
- Most Indebted Countries
- US Debt and GDP Over the Last Two Decades
- What is Happening with the American Consumer?
- 6 minute read
Revisiting the National Debt Discussion
I wrote Is the National Debt too High? last June. Today I want to go back and revisit some of the things I discussed in that article and give you some updated information on the state of our National Debt.
US Debt Clock
In reading back through my previous article, I realized that I failed to include a link to the US Debt Clock website, so I’m including it in this article. Figure 1 below is a screenshot of the Debt Clock, so you can see exactly where the National Debt was when I wrote this follow-up article. There is a ton of information there, so play around if you like that kind of thing.
Looking Back To 2020
At the end of the 1st quarter of 2020, our National Debt stood at 106.8% of GDP. I wrote at the time,
“…that increase is likely attributable to the stimulus money used to help ward off the potential economic damage anticipated from the Coronavirus’s shutdown of broad swaths of the economy. The second quarter’s numbers probably won’t look any better, and some estimate that we could see the debt jump to 110% of GDP or higher when released. I tell you that so you’re not surprised next month.”
I didn’t know how accurate that statement would turn out to be. Look at the first chart below. The debt as a percentage of GDP jumped all the way up to 137% for a brief time before falling back down to 128% today. The jump was a combination of massive federal stimulus and a more significant drop in GDP.
The drop in GDP proved to be quite temporary, and it subsequently recovered sharply, which helped get the debt to GDP ratio back down. GDP fell from $22 trillion to $19 trillion in a couple of months but has managed to get back to above $22 trillion in rather short order.
And, as we discussed in last years’ article, the debt to GDP ratio can, and does, come down from time to time. If the economy continues to expand at the rate it has been for the last several months, and the federal government removes some of the stimulus they’ve provided during the pandemic, we’ll see the debt to GDP ratio continue to fall back to levels that, while high, are somewhat more tenable.
However, if growth is elusive and the government continues to spend at its current rate, things could get much worse. As it stands now, our debt to GDP ratio is high, but as I illustrated in last year’s article, on a global scale, we’re the best-looking house in a bad neighborhood.
Most Indebted Countries in First Quarter 2020
Check out Figure 3 above. This is where we stood against the top 10 most indebted countries as of the 1st quarter of 2020. We were 11th.
National Debt in China
And as I stated then.
“China isn’t on this list? Well, they should be, and they would be at the top. Here’s why they aren’t. China’s “official” government debt to GDP is currently at 50.5%, as reported in December of 2018. Those are the most recent “official” numbers we can find.
(UPDATE: As of the 4th quarter of 2020, China reported their debt to GDP ratio at 65%)
What you have to keep in mind are the facts that;
- China has a very fast and loose relationship with the truth
- Nearly 50% of the corporations in China are SOE’s (State Owned Enterprises).
According to the World Economic Forum, China has 109 companies on the Fortune Global 500 list, but only 15% are privately owned. The rest are SOEs or State Operated Enterprises. These SOEs have considerable latitude to borrow money that is ultimately the responsibility of the Chinese government.
A recently released report from the Institute for International Finance (IIF) says China’s debt-to-GDP ratio for the 1st quarter of 2020 shot up to 317% from an estimated 300% in the 4th quarter of 2019. Yes, the country that everyone is afraid will buy America has a debt to GDP ratio of 317%. However, because the SOE’s debts don’t get reported as official government debt, they look excellent on paper. Thankfully, there are people out there like the IIF doing the hard work of discovering the truth about China’s finances.”
How Does the US National Debt Stack Up Today?
According to Trading Economic’s data for the 4th quarter of 2020, things have gotten worse for the rest of the globe, not just for the US.
Looking at Figure 4 above, you can see that we would still fall in 11th or 12th place globally in terms of debt to GDP ratio. The only question that I can’t answer, with any certainty at this point is, whether China would still be number one on this chart or if Venezuela has taken the top spot on its way to economic ruin. Only time will tell, and if I get updated information from the IIF on China’s actual debt to GDP ratio, I will certainly pass it along to you.
US Debt and GDP Over the Last Two Decades
Above, Figure 5 and Figure 6 illustrate how much our debt and GDP have increased over the last 20 years. Sadly, our government’s response to crises over this time frame has increasingly become throwing money at the problem.
They’re throwing money at it to stop the markets from falling and weak businesses from failing in the financial crisis. It’s also to keep innocent business owners shielded from the very real prospect of failure and citizens from the risk of bankruptcy, through no fault of their own, but due to questionable governmental responses to the pandemic most recently.
Whatever the cause, the total debt is now closing in on $30 trillion, a gain of 394.1% over the last 20 years, while our GDP is closing in on $23 trillion, increasing only 117%. We need to see economic growth to close that gap, and the sooner, the better.
What’s Happening with the American Consumer?
Finally, let’s check in on the American Consumer and see how they are doing with their Household debt. In Figure 7, you can see that, while total household debt has risen to $14.64 trillion over the last 20 years, it only requires 9.41% of disposable income to service. This is the result of low-interest rates for an extended period.
Figure 8 shows the result clearly. While total household debt has increased by 222.6% over the last 20 years, the amount of disposable income required to service that debt has fallen by 16.75%.
This is the same phenomenon, on the Federal level, that I believe will keep our interest rates low for MUCH longer than anyone suspects. Servicing $28 trillion in debt is much cheaper at 1% than at 5 to 7%. MUCH cheaper. And no matter what you think of the people controlling the interest rate levers at the Federal level, they can do math too. They might not have common sense, but they can do math.
I think it’s worth illustrating this with another excerpt from last year;
“Figure 9 shows the effects that interest rates can have on the amount of money we have to spend to service our debts. From the beginning of the financial crisis until the fed started raising interest rates in late 2015. Then in earnest in 2016, the amount of money we needed to spend to pay interest on the treasury debt was trending down, despite the expanding debt because the fed funds rate was zero. As they tried to normalize those rates, the cost to service the treasury debt began to increase. Now that the fed funds rate is back to zero, we should see that number start to fall again..”
US Government spending has ranged from a low of 33.4% of GDP to a high of 43.3%. The last reading in 2019 was 37.8% of GDP, down from 38% on the previous reading. As long as our economy keeps growing, those numbers should be kept under control, unless interest rates go back to historical norms quickly.
That’s unlikely to happen though, given the market’s reaction to the fed funds rate hitting 2.5% in the 4th quarter of 2018.”
Debt is a Tool
The takeaway here should be that debt is a tool. And just like any tool, one can use it correctly or incorrectly. It can be constructive or destructive. You can manage it, or it can become your master. Debt can help you or hurt you. It can promote growth, or it can lead to decline. But in the end, it’s just a tool.
All we can do is pray that those in charge of our Nation’s debt understand the tool they wield and respect the power therein. I fear that too many of them look at it as their personal piggy bank and a can they can kick down the road in perpetuity with immunity. I would love to be wrong about that.
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