The debt ceiling
This country is embroiled in another debt ceiling fight. It’s an event that has happened at least 100 times in the past 82 years. The ceiling has been raised 44 times by Democratic administrations and 56 under Republican administrations.
Our national public debt is now at $31.5 trillion. How should we think about that?
First off, you can’t just look at the dollar debt and say, “That’s way too much money! We need to cut the debt!”
Doing so disregards the wonderful economic system we have created in this country and the wealth it pumps out every year.
Think of it this way. Let’s say your neighbor has debt of $1 million. Is that too much? Well, if their total annual household income is $50,000, with no chance of increasing, it probably is. On the other hand, if your neighbor owns 100 percent of a business that generates $2 million in owner profit every year, then $1 million in debt is probably perfectly fine.
Now, the United States isn’t a household, so you can only take that analogy so far. But the point is the U.S. is prosperous and will continue to be prosperous. Debt isn’t fundamentally bad.
The question is: Can it be taken too far?
The best way to view debt, in my opinion, is as a percentage of our economic activity, otherwise known as gross domestic product (GDP). This places debt in context with the productive capacity of a country. As mentioned earlier, our U.S. debt is $31.5 trillion. Our annual GDP this year will likely be around $26.6 trillion. So, our debt-to-GDP is around 118 percent.
For perspective, Japan’s debt-to-GDP is closer to 250 percent. Does that mean the U.S. could, or should, follow suit?
There is a camp that says, “Don’t worry so much about debt. The U.S. can take on a lot because we are a very wealthy country. Look at Japan.”
And, oh, by the way, “Don’t you want to help your fellow citizens,” they ask? “Surely, a wealthy country like ours has a moral obligation to take care of citizens who have been dealt a bad hand in life. That’s what government programs do.”
That argument isn’t necessarily wrong, to an extent.
Here’s the problem: No one knows how much debt is too much debt. Is it 300 percent of GDP? 350 percent? 542 percent? Literally no one knows.
There is a limit, though. And while we don’t know where the cliff edge is, I think it’s prudent to avoid finding out. That means, I suppose, running this country more fiscally responsibly – and perhaps “cooler” than we truly could. The downside is that leaves some government programs unfunded and perhaps some citizens struggling more than they otherwise would.
But it would remove the possibility for a cataclysmic disaster that would inevitably descend upon us if we breached that unknown level of debt.
Continuing to permit an ever-growing percentage of debt-to-GDP is a game of Russian roulette. If you play that game long enough, you lose.
In an ideal world, the debt ceiling would be raised – because that’s what needs to happen in the near term to avoid upheaval – but both parties would agree to make sacrifices to slow the increase in future debt, maybe even pay some of it down.
The problem is neither party seems to have the willpower to limit spending.
Eventually the only options left will be the painful variety. Think raging inflation and nose-bleed interest rates. The immediate fixes would require some sacrifice today, no doubt, but they would be far more manageable than the solutions required if we continue racking up debt faster than GDP increases.
As the old saying goes, an ounce of prevention is worth a pound of cure.
Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at email@example.com.
This column is paid for by Invisor.