I have expressed in previous articles that I consider myself to be politically agnostic. I don’t believe either Democrats or Republicans have my best interest in mind. I have felt this way for a number of years now and the current political environment isn’t doing anything to change my mind.
One of the issues I have with the parties is how their views change depending upon which party is in office at the time. Democrats are worried about the Federal debt level now that there is a Republican in the White House, but they weren’t worried about it when President Obama was in office. Republicans were worried about the debt and deficit spending when President Obama was in the White House, but don’t seem to be worried about it now that President Trump is in office.
Over the past weekend, I got together with a couple of old college buddies and we were discussing the current political environment. One guy is a republican and the other one is a democrat. I wouldn’t say either of them is extreme in their political affiliation—not far right or far left.
We all agreed that the total debt and the deficit spending is a concern that we have. We also agreed that we think it is going to become a major problem for our country, its future growth, and our standing in the world. And we think it will happen in our lifetime.
Interestingly enough, the Wall Street Journal published an article on Sunday that discusses how some economists are making an argument that the U.S. debt level isn’t a concern and in fact might not be high enough. The foundation of the argument is that as long as the interest rate being paid is below the growth rate of the economy, the debt level isn’t a concern.
The overall debt recently surpassed $21 trillion and the Congressional Budget Office predicts that the annual deficit will eclipse the $1 trillion level in the year 2022. The CBO also predicts that the total debt will amount to 93% of the GDP by the end of the next decade.
Before the financial crisis and accompanying recession, the debt as a percentage of GDP was at 34%. At the end of 2018, it was at 78%.
Personally, I don’t care what other economists and analysts say—seeing debt to GDP over 50% is a concern to me. It was a concern when President Obama was in office and it is a concern now that President Trump is in office. It isn’t the kind of concern where you panic, sell all your stuff and move to a private island, but it is a concern that is going to have to be addressed by the people in charge.
The unfortunate thing is that politicians don’t want to talk about it on the campaign trail. They are afraid they won’t get elected running on a platform of raising taxes and cutting spending and they are probably right. But at some point, the citizens need to vote for those very people and I don’t care which party the candidate is from. We can’t keep expecting the government to spend more and more with less and less revenue.
If we remain on the current path, there will come a time when the sovereign debt of the United States isn’t a good bet anymore. It will be considered along the same lines as the debt of countries like Greece, India, or Argentina. At that point, the interest rate will have to be considerably higher in order to attract investors. At that point the argument about the GDP is growing faster than the interest rate will not work.
Look at India as a current example. The yield on 10-year bonds issued by India is currently near 7.5%. We haven’t seen sustained GDP growth of 7.5% since the early 80s and the federal debt and deficit was much smaller back then.
At some point, both parties will have to address the debt path we are on and will have to work together to get it under control. Other economists might think it’s okay to have a debt to GDP ratio of 78%, but I don’t agree.
I used to be the branch manager of a bank and I handled personal loans for the branch. We preferred that borrowers not have a debt-to-income ratio over 50% and ideally it would be down around 40%. I feel the same way about the debt to GDP ratio—I prefer that it would be down below 50% and ideally it would be down around 40%.