Thursday, February 04, 2010


National Debt/GDP = 86.6%
The debt clock shows the ratio of National debt to GDP. It is currently 86.6%. GDP is approx. 14.5 trillion. If we continue to add $1 trillion plus that the Obama administration projects we will be over 100% of GDP by 2011.
Japan has a debt/GDP ratio of 220%. They are in big trouble. Their current long term interest rate is 1.4% and if it goes over 4% then their debt payments will be greater than their tax revenue. Japan got to 220% because 95% of that debt is financed by Japanese savers. 57% of U.S. debt is financed by foreign savers. We won't get to 220%.
Japan has been trying a Keynsian spending program to spur aggregate demand since the mid-90s. That is why they went from being a creditor nation to a debtor nation. It didn't work. Why are we trying the same thing?
What is the magic debt/GDP number that triggers a crisis in the U.S.? I have no idea. But you will know we have passed it when you needed a wheelbarrow to carry your grocery money.
There is no good solution to our current debt problems. What has to happen is that prices need to fall to a level that will allow our debts to be cleared. The owners of these assets which were pumped up during the bubble will likely be bankrupted. The people who held cash will buy the assets and then we will be done. This means a high level of unemployment for several years and low growth for as long as a decade. Think Great Depression. But there is no other way.

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