U.S. Debt Is Staggering, But Not Unprecedented

by: Toro November 26, 2008    

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I am seeing a lot of hand-wringing in the blogosphere about the amount of debt being put on the U.S. government's balance sheet.

Now, let me say, I am not minimizing the enormous problems in the asset markets and the general economy. They are massive. The numbers being tossed around as a solution to the problems are staggering, and now the number is in the trillions. That's plural, and with a "t." The fact that we allowed ourselves to get into this mess is unconscionable.

However, the amount of debt that America is going to raise relative to output is not unprecedented. Debt to GDP hit 120% during World War II, roughly double the ratio today.

click to enlarge

Debt-and-GDP

We did not collapse into an abyss in 1946. And we will not collapse into the abyss any time soon either.

True, we have come far too close to the abyss than we should have. This recession is going to be nasty and possibly prolonged. And there is a pretty good chance we will go through another shock if and when the credit default swap market unwinds.

However, there is still substantial room to raise a whole lot more debt, especially when investors are more than willing to take multi-decade low yields to hold U.S. government paper.

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This article has 8 comments:

  •  
    Nov 26 03:39 AM
    But the debt problem is going to get much worse: we have the baby boom generation in its peak earnings years. So it should be piling up the savings for retirement--and debt should be at a record low. As the baby boom generation moves into retirement both social security and Medicare expenditures will increase dramatically--resultin... in a massive increase in US debt. Not to mention numerous other problems the country is facing like peak oil, global warning, infrastructure decay...
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  •  
    Nov 26 09:29 AM
    Very illogical. Our GDP is going to falter and then drop precipitously while at the same time we are still trying to borrow our way out of this developing mess. Greed and unristricted capitalism has destroyed the american dreams of many and soon many more. The very sad fact is that many,many people don't see it yet. Our country is in very troubled shape and we are only starting to see the ramifications of this developing disaster.
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  •  
    Nov 26 09:34 AM
    Your comparison that 120% debt during WW2 really is apple to oranges-it's a different world with many social service and medical programs to support, expanded in large part in the early 1960's and beyond.

    It is very possible that the USA will lose its' credit rating. Take a look at I.O.U.S.A. to see just how close we are to the abyss.
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  •  
    Nov 26 12:30 PM
    Kudos Optionsgirl, I 100% agree. I made a comment similar to this on a previous post related in topic. In the 1940's marginal tax rates were much higher (topping out around 80%) but the average worker was paying much less (probably mid to high single digits) so the Feds were able to tax down the debt. Today top marginal rates might be lower, but b/c rates are flatter most people are paying closer to the max then they were in the 1940's. That's not even including the local income & property taxes ($7400 on a $350K house, thanks NJ). Face folks Uncle Sam & his local cousins are teetering dangerously on the brink of BK, and only massive printing pressess (e.g. Germany 1920's) or massive cuts to our social welfare progams (sayonara Soc Sec, Welfare etc.) are going to be the only answer if we don't change course sooner rather than later.
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  •  
    Nov 26 02:36 PM
    "Debt to GDP hit 120% during World War II, roughly double the ratio today."

    Two differences: 1. Despite Afghanistan and Iraq, today's economy is not one being distorted by the exigencies of total war - it's being distorted by self-inflicted economic mismanagement. 2. Debt run up in WW2 was largely owed to domestic creditors. Today it isn't.
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  •  
    Nov 26 03:00 PM
    "However, there is still substantial room to raise a whole lot more debt, especially when investors are more than willing to take multi-decade low yields to hold U.S. government paper"

    What happens when they suddenly decide they WON'T accept such low yields and then decline to purchase our debt? How great will it be to not only issue new debt, but roll over maturing debt at 12% rates of interest or higher? .... GULP!

    You won't ever hear the blathering heads admit this is possible on the tv. Not only is it possible, but the odds are increasing the more debt we pile on attempting to 'fix' our current problems.
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  •  
    Nov 26 11:51 PM
    Random thoughts:

    1. i wonder what Europeans and ECB actually think of our lack of concern for our dollar? Mike we end up with duel currencies; relying on ECB for stability of at least one currency?

    2. If treasury declines due to plain old profit taking, coming off a high - is every in the treasury bubble yet? - what if our dollar drops out of site? Do we have a cache of Euros to buy oil with, since only yen or Euros might be accepted?
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  •  
    Dec 01 09:54 AM
    most people here are also missing the fact that US global business did not exist during WWII. Those countries that are buying our debt securities do so to to assure that we do not go out of business. Foreign owned debt will continue to increase as long as we have business' overseas. You want foreign owned debt to decrease then start some business and produce here (Tree Huggers!)

    The entire 10 trillion is backed by securities bought and paid for by domestic and foreign entities. It is to their benefit to not see us go down since the only thing that will happen is that their investments crash and they end up in the same situation as the US.

    This issue has been beaten to death and a ton of people spreading a ton of bologne love to talk about it.

    Toro - do me a favor and write about how borrowning from yourself is not necessarily debt that needs to be repaid as long as you borrow for certain things. You vest your time in the certain things part! Thanks
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