As regular readers know the national debt is an issue we are very concerned about and discuss here frequently. Today we are pleased to publish an original op-ed concerning the danger posed by the national debt by Murray T Holland, author of "A Nation In The Red."
By Murray T. Holland
I wrote A Nation in the Red as a call to action for concerned citizens to save this country before we become inextricably caught in the debt trap that has shocked the economies of so many countries. Moms and dads, and especially moms and dads of children in their teens, twenties and thirties (this is the generation that will shoulder the burden of this debt), need to become informed of the problems that this much debt creates and make an issue out of it with all your friends, colleagues, schools and businesses. That is the action step that each concerned parent must take.
The first question most people ask is how much debt do we really have? Today, we have a pile of debt that equals the debt level we had in 1945 after World War II. That debt was 120% of our total economy or Gross Domestic Product (GDP). The ratio of debt to GDP is the best method of assessing how much debt we have. The U.S. has $12 trillion borrowed from the public which is real cash borrowed. It also has $5 trillion that it borrowed from various trust funds like Social Security it manages. This money is not real debt since the government will have to fund Social Security out of tax receipts from any source. Our government does have, however, $7.5 trillion in unfunded pension liabilities that in the real world of accounting is a real liability. In total, we have $19.5 trillion in liabilities, which is 122% of GDP. This amount exceeds our debt levels at the end of World War II and doubles the amount of debt the European Union set as a safe level for its members. U.S. now has the ninth worst debt/GDP in the world. Further, as deficit rates exceed GDP growth rates, the debt/GDP ratio continues to get worse. This by itself is a BIG RED FLAG.
Interest expense on the national debt is what sinks countries. The zero interest rate environment we have today masks the underlying problem. When we return to normal interest rates (6%), our interest expense will jump to $720 billion/year or 25% of tax receipts. We are watching what happens to countries with our debt problems in real time. Spain, Portugal, Greece, Argentina and close behind Italy and France, are on their knees; all brought down by excess debt.
For countries that get to our debt levels, there are unfortunately only five methods out of the trap. The most used method is default and repudiation. Unfortunately for all of us, this method would devastate the world economy and needs to be avoided. The second method just recently created is a bailout, which of course is not available to us due to our size. The third method is pay the debt with newly printed money, but this has hyper-inflation side effects. The two remaining methods are grow the economy and balance the budget by spending cuts and tax increases. If we utilize the last two, my calculation is that we will be back to a 35% debt/GDP ratio in 36 years of good growth and balanced budgets. This is where we were in 2008, five short years ago.
Murray T. Holland is a 30-year veteran of the finance industry and managing director of Dallas-based MHT Partners. He is the author of a Nation in the Red (McGraw Hill, October 25, 2013). Readers are encouraged to visit ANationintheRed.com for more resources.