Follow by Email

Wednesday, July 27, 2011

THE DEBT AND THE DEFICIT


What would you say is the most serious threat to the United States? The Economy? Crime? Terrorism?  Many experts would argue it’s our own fiscal irresponsibility.

Our never-ending legacy of deficits is the growing fiscal cancer that could one day destroy America.

How many times have we heard that we are going to cut waste, fraud and abuse?  How many times have we listened to the same old rhetoric about the partnership between government and the people?  All those empty promises about not leaving this burden to future generations.

Kennedy, Johnson, Nixon, Ford, Carter, Reagan, Bush I, Clinton, Bush II have all echoed the same sentiments in speeches but ultimately their words ring hollow as the National Debt continued to grow. 


If you should somehow spend more money this month than your income, you would have a “budget deficit”.  To cover your shortfall, you borrow using your credit card.  The amount you borrow is your debt. As we all know, you must pay interest on your debt.  If you do this month after month, you will need to continue borrowing and racking up more debt interest. After some time you can end up with the interest payment on the loan becoming the largest item in your budget.

A good illustration of this situation is to take a look at the 2009 Budget for the U.S.: Social Security - $610 Billion, Medicare - $330 Billion, Medicaid - $ $204 Billion, Military - $607 Billion, everything else - $936 Billion.

Now compare those figures to the 2008 Federal revenue figures: Personal income taxes - $1,220 Billion ($1.2 Trillion), payroll taxes (FICA) - $910 Billion, corporate income taxes - $345 Billion, other revenue - $46 Billion. 

The deficit that year was $410 Billion.


As I write these words the U.S. National Debt is $14 Trillion and growing. The means that each and every taxpayer now owes $130,048.

The crazy thing about that number is that just a few years ago (February 2007) the debt was “only” $8.7 Trillion. At the same time our Gross Domestic Product (GDP) was $13.5 Trillion.  Many times you will hear people speak of our debt to GDP ratio.

A country’s Gross Domestic Product represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy.

The Budget Deficit is the sum total of all annual deficits and surpluses going back to the beginning of our Federal Government in 1776.

The debt-to-GDP ratio is one indicator of an economy’s health. In the above example the ratio is 64%. Our GDP right now is $14.8 Trillion so the debt to ratio today is 98%.  While our debt has darn near doubled, our output hasn’t grown very much.

The war for our independence created much of our early debt so you might say it’s in our national DNA. 

After the American Revolutionary War, on the first day of our federal government (March 4, 1789) we were $75 million in debt, which was approximately 40% of the economy (GDP).  Our founding fathers were so alarmed that they immediately set about paying it down. By 1835 the Federal Debt was zero.  The only time in American history that this has happened.

In the last 40 years we’ve had 35 budget deficits and 5 budget surpluses.  Clearly, if we’re going to get out of this mess, we’re going to have to reverse that trend.

Given our history what do you think our chances are? The very existence of our country hangs in the balance.

No comments:

Post a Comment