March 2, 2012 · By Robert Romano · 1 Comments
The national debt to GDP ratio is now over 100 percent. It’s official now.
Well, almost. We’ll know more when the first quarter Gross Domestic Product (GDP) numbers are published by the Bureau of Economic Analysis on April 27.
But, based on a preliminary analysis of data on the GDP and national debt figures from the Bureau and the U.S. Treasury, barring greater than expected GDP growth in the first quarter, the national debt probably eclipsed the economy in sheer size, perhaps never to return, on or about Feb. 23, 2012.
Since the beginning of the year, the national debt has grown by $265.58 billion, or about $4.42 billion every day, to $15.488 trillion. That compares with an economy that is probably only growing by about $1.66 billion a day to a current level of about $15.420 trillion.
Therefore, the current debt to GDP ratio is already 100.4 percent — and climbing.
When Barack Obama took office it was a little over 74 percent when the debt was about $10.4 trillion. The reason the ratio has skyrocketed is because the debt has been growing much faster than the economy. While the economy grew at 1.8 percent in 2011, the debt grew by over 10 percent, an astounding figure.
In 2012, this process will continue, when the debt will grow at over 7 percent for the year, much faster than the economy, which is only expected to grow at 3 percent.
Meanwhile, some economists, calling themselves Modern Monetary Theorists, still maintain remarkably that debt really does not matter at all. That as long as the nation’s central bank prints more money to perpetually refinance the debt, all is well.
Except, the larger the debt becomes the more it is a drag on the economy. Economists Carmen Reinhart and Kenneth Rogoff have found that gross debt levels above 90 percent tend to have a draining effect on economic output — even with central bank intervention.
To be certain, as the national debt has climbed astronomically in the past three years, the economy has been sluggish at best.
Moreover, the sovereign debt crisis in Europe — brought on by too much government spending and an inability to refinance every larger sums of debt — has wrecked havoc on markets since 2010, harming growth.
No nation can long endure where, just to keep our heads above water, greater and greater portions of the national wealth must be dedicated to a useless paper trade — i.e. refinancing an ever-larger debt. The more money that is invested in government debt, the less money there is simply to invest in assets like equities.
The only way out of this vicious cycle is to reverse the relationship of debt and economic growth to one where the growth of debt is predicated on economic expansion, and not the other way around — because debt does matter.
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