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Beg, Borrow and Borrow

Posted November 1, 2009 by David Hamra

The 3.5% increase in gross domestic product (GDP) for the third quarter was hailed as good news and evidence that the recession is likely over. On further examination, however, most of that increase was attributed to government subsidies (first-time homebuyers and “cash for clunkers”) and other increased federal government spending.

These are undoubtedly extraordinary times which call for extraordinary measures. For the fiscal year that ended on September 30, federal government spending was up over 18% from the prior year while the recession pushed revenues lower by over 16%. While there is some room for debate about the impact of growing government deficits (most economists have serious concerns), they are undeniably big and getting bigger. Christopher Rugaber of the Associated Press gathered some interesting reference points for the deficit.

2009 fiscal year GDP: $57 trillion

2009 federal government revenue: $2.1 trillion

2009 federal government spending: $3.5 trillion

 

2008 deficit: $459 billion (a record at the time), 3% of GDP

2009 deficit: $1.4 trillion (triple the prior record), 10% of GDP

2019 deficit: $1.2 trillion (Congressional Budget Office projection)

 

Highest deficit percentage of GDP since 1940: 30.3%, 1943

Next highest: 21.5%, 1945

 

Number of years since 1940 with a surplus: 12

Longest consecutive years of deficit since 1940: 28 (1970 to 1997)

Cumulative surplus from 1789 to 1849: $70 million

Cumulative US debt from 1850 to 1900: $1 billion

 

Lowest national debt (cumulative deficits) since 1900: 2.7% of GDP, 1916

National debt after World War I: 33.4% of GDP, 1919

National debt after World War II: 112.7% of GDP, 1945

Postwar low for national debt: 24.6% of GDP, 1974

2009 national debt: 51% of GDP

2019 national debt: 81.7% of GDP (CBO projection)

 

Interest payments in 2008: $253 billion

Interest payments in 2009: $191 billion (record low interest rates reduced payments)

Interest payments in 2019: $799 billion (CBO projection)

 

Proportion of federal spending                     2009                        2019

Interest payments                                              4.7%                      14.6%

Military spending                                              18.1%                      13.5%

Medicare spending                                            11.6%                     16.4%

 

Politics aside, it is not a pretty picture. The national debt is growing to levels not seen since the end of World War II, and is much higher than other wars or even the Depression, when at its peak the debt was 43% of GDP. Interest payments alone are projected to triple in the next 10 years, much faster than even the growth in Medicare, which is typically described as being “out of control”. And since the last three years of budget surplus ending in 2000 only reduced the debt by $360 billion, making any significant reductions in the debt is hard to imagine.

Still, these kinds of numbers are so abstract that they are hard to grasp. Here is how a similar financial position would look for someone earning $100,000 a year.

 

Annual income: $100,000

Total annual spending: $167,000

Annual interest payments: $9,095

Total debt: $1,384,285

Annual interest payments in 10 years: $28,252

Total debt in 10 years: $2,217,570

 

Any financial professional would advise this person that he was headed for disaster unless his income were to increase dramatically, and fast, or he were able to sell assets that had increased in value. Unfortunately, the government’s source of income is taxes, and increases in taxes eventually reduce growth, putting further pressure on deficit spending. And the government’s prospects to “sell assets” (sell property or rights to provide services to private companies) is limited.

We have drifted a long way from Alexander Hamilton’s position that “a national debt, if it is not excessive, will be to us a national blessing” (emphasis added). Of course, things could change dramatically in ways we don’t expect. In June 2000, the Clinton administration predicted the surplus would increase by as much as $1 trillion over the following 10 years.

November 2009

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