Sunday, January 6, 2013

US Debt Basics

Ok, It's time for some big number math. As of January 3rd, 2013, the total out standing US debt held by the public stood at $16.4 Trillion dollars. That's about $55,000 dollars for every person in the United States. The size of the annual US economy was approximately 15.8 Trillion dollars. About $52,000 per year per person. So, if (and it's a big if), we wanted to pay off the debt over the next 50 years it would cost everyone about a thousand dollars a year. Below you can see a chart of the total outstanding amount of debt.

However, many economists don't believe the level of the debt is important. Instead what is important is the level of debt to GDP and whether that level is increasing or decreasing. Currently the level in the US was about 67% of GDP in 2011. However, there has been no run on US Treasury Bonds. Global investors still buy treasuries at record low rates. No one knows what level of debt is bad for a specific economy. The United Kingdom is about 85%. Spain is around 70% and Greece is around 170%. Most economist believe that if the debt is kept below 75% of GDP on average it has no impact on the economy, especially if the economy is growing. It is possible to "grow" you way out of debt by holding the debt fixed while the economy expands. In addition, the debt can fluctuate higher during a period of slack demand without causing problems such as inflation.
The red line shows the projection of the Obama administration. Every administration has a projection that shows the debt decreasing. The projection is the administration budget proposal. While the president proposes, it is congress that spends the money and is ultimately responsible for the debt. One topic people like to argue over is which presidential administration increased the debt the most: Democrats or Republicans. The answer is: It's a tie. Since President Ronald Reagan in 1981 the democrats have increased the debt about 7.7 trillion dollars and the Republicans about 7.5 trillion. The biggest reasons for the current debt increase were: 2 wars and a large tax cut under Bush-43 and the recession under Obama-44.

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