Debt Limit Now 100% of GDP

The image to the right shows the national debt in 2004, when it was just over $7 trillion, or $7,000,000,000,000 for those who like zeroes. In scientific notation, it’s $7.0 * 10^12. Currently, the debt stands at $12 trillion or so, and the debt limit now lets it go to $14 trillion.

$14 trillion is 100% of GDP, and taking our debt beyond that number puts us in danger of going over a tipping point.

I’m working through a book titled This Time Is Different, an economic history of financial disasters. While debt equal to 100% of GDP is not a magical moment that guarantees destruction, like a physics experiment about to go horribly wrong, it still signifies great dangers ahead. Think of it more as a sign that says, “DANGER! DO NOT ENTER! LANDMINES!” While a passerby might get lucky and make it through the minefield, chances are he steps right on one and faces terrible consequences.

Actually, in the case of the USA, it’s more like a sign saying, “DANGER! YOU’VE BEEN IN A MINEFIELD FOR SOME TIME, BUT NOW THERE ARE LOADS MORE MINES HERE!” The USA is in a debt crisis and the proper way out of it isn’t through borrowing more money.

The problem is that any solution to the situation will be painful. If Congress really does balance the budget, we’ll have an economic depression. If not, then we may have a borrowing crisis when lenders refuse to lend any more at current rock-bottom rates. An increase in interest rates could break the budget and that would force an end to deficit spending… and another, possibly more severe depression.

So will Congress bite the bullet and slash the budget? Hardly likely, and that’s my assessment for Republocrats and Demicans alike. This is an election year for one-third of the Senate and the entire House of Representatives. Who wants to campaign on a “I’m going to put you through severe pain” ticket?

4 thoughts on “Debt Limit Now 100% of GDP

  1. David Truong

    I remember you talking Greece being bankrupt once in class before. Interestingly enough, there was an article in the Sunday paper about this and it mentioned that Greece’s debt is 113.4 percent of their GDP and they are in financial ruin. The writer believes we are headed in that direction and that what happened and is happening to Greece will happen to the U.S.. The funny thing is, our government system and economic system isn’t exactly modeled like their since they are a old-style complete democracy. Anyways, she concludes with saying that we need reform and, basically, with our power, there is still quite a while before things are that bad. How reassuring…, not.

  2. David Truong

    I actually read another article that says that no matter what we do to cut spending, the deficit is too huge for the action(s) to have any impact and it would still be huge. We would have to keep on cutting and cutting different programs over time to eventually balance the budget in a time when everything is costing more and more and we are in desperate need for these programs, well most of them anyways. Even cutting all national security spending would still result in a $421 billion deficit out of the $1.267 trillion. Scary stuff.

  3. deanwebb Post author

    Yes, it’s highly ironic that many social programs were created in Great Depression One and that they might be undone in the course of Great Depression Two.

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