Debt as a Percentage of GDP

The apocryphal saying by Senator Everett Dirksen is that the purpose of GDP is to make everything else look small by comparison.

From an economic point of view, it’s not debt as a percentage of GDP that matters, but debt as percentage of available savings, which is alarming if you don’t, either as a nation or individually, HAVE any savings.

As Auburn economist Roger Garrison points out, government borrowing and debt have obvious consequences that are all bad for the economy no matter what the GDP figures are. Garrison writes:

The effect of the deficit will be:

•  higher interest rates (if the government borrows domestically).
•  increased inflation (if the Federal Reserve monetizes the debt).
•  weakened export markets (if the government sells debt abroad).
•  tax hikes (possibly in the form of a Johnsonesque “surtax”).
•  or, all the above in some combination

GDP measures output. That can change from year to year. The assets of the country, from home prices to stock prices, can change from year to year and day to day.

But the liabilities we accrue now and tomorrow are the burden that keeps getting heavier. We must tax more later, to pay for what we borrow now. Or, we must borrow more later, to pay for what we borrow now, and all of that assumes there will be a lender. Nothing new or productive is produced with this borrowed money, which is why lenders (foreign central banks) are going to get increasingly tight.

Debt’s effect over the long run is to lower growth and GDP. So, measuring deficits as a percentage of GDP is like measuring liver cancer as a percentage of body fat, a non sequitur. You’ve still got cancer and you’ve still got body fat. The one is going to kill you. The other is going to be killed.

Too much debt and chronic deficit spending hamstring an economy’s ability to grow. The people who suggest that everything is OK because the debt-to-GDP ratio is historically acceptable aren’t doing Americans any favors. They’re encouraging Congress to keep spending more than it has, and Americans to borrow money today that will cost them more to pay back tomorrow.

It’s hard to pay debt back when you don’t have any savings. It’s hard to pay debt back when your income is growing. And it’s even harder to pay debt back when you have to borrow from one creditor to pay another. That is called insolvency, and it is the result of not taking your problem seriously enough because it was a small percentage of GDP.

GDP really is the most meaningless statistic we have going these days. That nation’s financial health is not measured by the accumulated output of its citizens…it’s measured by the individual financial behavior of those citizens and their government, and that behavior is pretty bad. You wouldn’t measure the quality of a meal by the loudness of a man’s belch.

The Daily Reckoning