We are quickly reaching critical mass when it comes to the national debt to gross domestic product (GDP). As I write this the national debt is 103.2 percent of GDP and expanding.
Our national debt is the excess of spending over revenues each year that must be borrowed. The excess of spending over revenues is better known as the annual budget deficit. Today’s national debt is the accumulation of the annual borrowings to pay for the annual budget deficit.
The GDP is the sum total of all goods and services produced by an economy for a given period; a month, a quarter, or a year.
What is considered a safe level of national debt to GDP? The safe level is considered to be 60%. The problematic level of debt to GDP is considered to be when the debt reaches 100% of GDP. We are currently in the beginning of the problematic stage for national debt.
There are a number factors that impacts the problematic stage for the national debt of a given economy. Economic growth, interest rates, the ability to create money, total debt (public plus private), and the ability to borrow from foreign countries all are contributors to the establishment of problematic level of debt.
If a country’s national debt and GDP are both growing at the same percentage rate then the debt ratio is being stabilized. If a country’s debt increase is more than the growth in GDP then the debt to GDP ratio increases making the debt more problematic. When a country’s percentage of debt growth is less than the percentage of GDP growth the debt becomes less problematic.
During the George W. Bush years it was projected that the United States national debt to GDP ratio would reach 185% by 2035. At the end of 2008 our national debt to GDP ratio was 70.56%. Today we are at 103.2% of national debt to GDP ratio a growth rate that has far exceeded what was projected for 2015 just 7 years ago. At our current growth rate in national debt to GDP we will reach that 185% long before 2035!
We must change our spending habits at the national level. Or we must have substantial increases in our GDP growth rate. The national debt of the US is already in the problematic stage, so without decreases in spending or increases in GDP growth the United States will soon be in the same situation as Greece or closer to home the US possession of Puerto Rico. Greece can no longer borrow without extensive changes in their spending habits. Puerto Rica is facing a debt crisis with a debt to GDP ratio of 68%. Puerto Rico’s commits on bonds far exceeds its ability to pay causing Puerto Rico to scramble to meet its debt payments.
US national debt is quickly reaching the point that borrowing will become difficult. Financing the US debt with creation of money presents a whole set of problems other than the inflation or hyper-inflation that it will create.