Has the U.S. Spent Itself into a Hole It Can't Spend Its Way Out of?

Economists tend to downplay the deficit by citing the fact that the US was in much worse shape following World War II when the deficit was 109% of the GDP. It has been accurately pointed out that the U.S. Economy went on to become the darling of the industrial world and that we were able to raise our standard of living through a rush of consumer buying that was the envy of the world.

That was 1946, this is 2009. From 2005 to 2007 the US economy was steadily increasing and the massive deficits run up in that three year period (some two trillion dollars total) mirrored the steady rise in the gross domestic product. So much so, that the percentage rise from 2005 to 2007 was slightly more than 1% overall. As we all know, 2008 was the exception to the rule (how much of an exception is still being determined) but the initial figures are enough to give pause to the most exuberant economists.

Based on the GDP estimates of the 4th quarter 2008, US GDP is expected to fall for the year by 400 billion dollars. At the same time, the total increase in the deficit for 2008 was slightly more than one trillion dollars. These two factors combine to rocket the percentage of GDP from 66.84% to 79.69% in a single year, after three years of slightly more than a 1% overall increase!

What could be a portent of things to come, should the GDP remain stable for 2009 (although most economists expect it to contract further given economic realities), the percentage of debt to GDP would increase to around 94%. In layman's terms, the US government would owe 94 cents on every dollar generated by the US economy. If the economy contracts in 2009, the percentage would rise even higher.

US Government spending on the interest of the debt has shuddered to a halt for FY 2009, basically frozen at the same level as FY 2008. This is happening at a time when we added a trillion dollars to the debt in 2008 and are looking to add two trillion dollars more in 2009.

At the start of FY 2009, the US Deficit stood at slightly more than 10.1 trillion dollars, not counting the remainder of the TARP program (about 400 billion) and the 850 billion proposed 2009 stimulus package. Add in the costs of the wars in Iraq and Afghanistan, which are not included in the regular budget, and reaching the two trillion dollars in deficit spending being predicted is not only likely but inevitable.

We are headed towards a point where our outstanding liabilities are going to exceed what our economy can produce. With all the attention being spent on the banking fiasco, we may not realize our predicament until the numbers take us into uncharted territory.

Remember, in 1946 we were the world's industrial giant. In 2009, the reality is that we are a consumer, rather than a producer. It just so happens that we have spent our way into a hole that we may not be able to spend our way out of.

Comments

[J. Nielsen]

It is entirely up to the current administration to limit their spending in order to avoid building up more excessive debt. The governments role is to create a functional economy where innovation thrives and creates jobs,not an economy where government dictates where jobs are created through their spending.

The stimulus plan will not work, simply because it is not a stimulus plan. It is a 3 year spending plan, with limited stimulus, as the majority of the money spent this year is through tax cuts, which will be saved until lighter days. The same effects of the now $825-900 billion plan, could be achieved for 1/3 of the price approximately, if they targeted the money towards the problems.

If the government wants to put blame on somebody for this crisis, they are going to do this through over-regulation, which in turn, will prolong not only the crisis, but also halt job growth and innovation.

It is not too late to turn this around and some day balance the budget and pay off the debt.

But if the main obstacle for moving forward is the growing government itself, then we have a problem.

2009 Jan 28 10:37 AM

[market ace]

This problem is so obvious that no politician in Washington (save maybe Ron Paul) can see the ultimate problem. Worse yet the new policy to back up all of this debt by taking in toxic assets and more bad debts is beyond all logic. As long as the goal of politicians is simply to get reelected or retire fat and happy instead of letting markets correct without interference the US is headed for dooms day sooner rather than later.

2009 Jan 28 10:38 AM

[John Polomny]

I place the majority of blame on the American people. The government they elect is a direct reflection of their values. People want things from government but do not want to pay. They elect people to Congress that tell them that this fantasy of a free lunch is possible. It is interesting that you mention Ron Paul as I got involved in his campaign and found very early on that most people are not interested in liberty or self reliance. Most people are collectivists yet dont even know it and would never admit it. Freedom, less government, liberty were rejected by the majority. I heard someone say once that people do not get the government they want but the government they deserve. It is our values that are being carried out by the pols in Washington and the state legislators. Look at California, the state is facing a $48 billion dollar deficit yet if you go online and read the comments in the California papers the people are unanimus in their sentiment that the budget should be cut but that their sacred cow should not be gored. America the land where people think it is right and correct to attempt to live off their neighbor.


On Jan 28 10:38 AM market Ace wrote:

> This problem is so obvious that no politician in Washington (save
> maybe Ron Paul) can see the ultimate problem. Worse yet the new policy
> to back up all of this debt by taking in toxic assets and more bad
> debts is beyond all logic. As long as the goal of politicians is
> simply to get reelected or retire fat and happy instead of letting
> markets correct without interference the US is headed for dooms day
> sooner rather than later.

2009 Jan 28 11:35 AM

[CJJ]

I would look at this all a little differently. While I think the current issues have a lot of blame to go at the feet of the politicians, business leaders, citizens, the question is, can you argue with the results? Sure the last year and an undertermined number of years into the future is going to be tough, but over the last 100+ years I don't think anyone can argue on the results from the US. If you do argue, you're not worth arguing with because you're disagreeing just to disagree.
Most of the issues here are human nature. Everyone is going to flock to what is making money. You cannot stop that. The Government can't, the CEO's cant, and the citizens can't. Its happened throughout time and its not going to stop just because of this bubble bursting. More, economic models don't take into account human rationale or irrationale. These petri dish suggestions and analysis amount to a load of crap. I can go find 10 people who say the stimulus is wrong, 10 who say the stimulus is right, 10 who say it is too little, 10 who say it is too much, 10 who can't say stimulus and 10 who don't even know what stimulus is.
The media today is a rampant cancer. No news outlet is biased. Now with the internet you don't even have to fake being biased, you can come out and say what ever you want. Everyone is an expert, everyone knows 100% what is coming, except everyone version of the future is different.
People today don't have the stomach to live through tough times. People need to be placated on a minute by minute basis. I could write books and books about the news articles and blog post and comments written about Obama's precidency and the guy has only been in office for 8 freaking days.
At some point people will realize living and actually doing things solve problems is infinitely more important than theorizing, writing, complaining and life.

2009 Jan 28 01:42 PM

[Jason Rines (iThinkBig)]

Nice article, concise and with some figures to back it up. The U.S. can pay down the debt, it just means very slow growth as interest rates climb. This downturn seems to be much like the 1870's depression then the 1930's not saying that was a particular lovely time from what I read however. Noriel Roubini seems to have been consistently accurate in the prediction of this downturn and I agree much with it's future, with the exception he believes U shaped and I believe W shaped. Both agree on the recovery being very slow in growth 1% for a few years.

2009 Jan 28 01:45 PM

[Hefaistos]

There is really no problem with the figures of debt to GDP as long as it is below 100% and USA keeps its AAA rating. The debt service is still very low, and will remain so. The real trouble will come if deficits will remain, adding to debt levels each year. Deficits should be seen as investments for the future, investments that will bring higher growth and GDP in the future.
Also, debt is a stock, and GDP is a flow, so they are like apples and pears in that respect.

2009 Jan 28 02:49 PM

[Chris B]

"We are headed towards a point where our outstanding liabilities are going to exceed what our economy can produce."

In what timeframe - 1 year? Forever? Taking on more debt than you can pay off in the next couple of years is how every successful business in the world works. It's how your 30 year mortgage works. Leverage is no problem IF AND ONLY IF you can earn a higher ROI than you pay out in interest. The govt is currently borrowing at less than 2% interest so if the "stimulus" manages to produce economic transactions that generate more GDP and taxes than that, the US "profits" so to speak. Don't we all wish we could borrow a few million at 2%!

"There is really no problem with the figures of debt to GDP as long as it is below 100% and USA keeps its AAA rating."

Japan and most European countries have debt/GDP ratios of 150-200%. Yet they are among the most credit worthy countries in the world.

"US Government spending on the interest of the debt has shuddered to a halt for FY 2009, basically frozen at the same level as FY 2008. This is happening at a time when we added a trillion dollars to the debt in 2008 and are looking to add two trillion dollars more in 2009."

Explanation: We're rolling over our debt into much, much cheaper interest rates. Basically the equivalent of refinancing the national debt from 5-6% to 2%. Even as the principle grows, the lower interest means lower payments.

"I place the majority of blame on the American people. The government they elect is a direct reflection of their values. People want things from government but do not want to pay. They elect people to Congress that tell them that this fantasy of a free lunch is possible. "

Absolutely true! For almost 30 years, we've been cutting taxes and raising spending, leaving the debt for someone in the future to handle. The same government the Reaganites decried as wasteful now sends 9% of my federal taxes to pay just the INTEREST on the debt they started. That would be fine, except I think I received very little benefit from wastes of money like the Iraq war, agricultural subsidies to leave fields unplanted, and tax cuts for the hedge funds that ran up gas prices last summer. The ROI for those massive wastes were negative.

Just like in business, the exect level of the debt matters a lot less than what we do with it. If government can again become proficient at the basics of what it is supposed to do: education, infrastructure, public safety, rule of law, etc. then we will live wealthy lives regardless of debt ratios. If government fails in that regard, not even being debt-free could prevent us from becoming a 3rd world country.

2009 Jan 28 05:10 PM

[Dave Wrixon]

No, because its debt is dollar denominated, it always has the option to simply inflate it all away.

2009 Jan 28 05:33 PM

[k9s-4-k8]

One huge advantage we had in 1946. We rebuilt Europe. After years of war that devastated their economies, they were on their backs economically. If they needed something they had to buy it from the U.S. Because they were in such horrible shape initial purchases were on credit but this rebuilding and our own rebuilding provided significant growth to our economy. The huge outlays during the war are compared to a relatively stagnant domestic economy. Today, we have the stagnant economy but we have competition all around us. We will also be faced with an ever larger energy expenditure as applied to our overall economy for years to come. The U.S. government is spending the last drops of our good will credit for whatever that's worth. We're banking on other governments recognizing that while we are spending an absurd amount, other countries are still more dependent on us for their economic vitality than we are on any of them. Nevertheless, I expect that will be changing.

2009 Jan 28 06:09 PM

[randy123]

Yes... Blame it on the American people that they have to pick one of the politicians put in front of them by the media.

You sound like a corporate republican. It can't be the criminals using lawyers and lobbyists to create loopholes in legislation that allows them to "escape" the "highest corporate taxes on the planet".

You sound like a two faced republican who out of one side of his mouth shouts "Country First" then whispers out of the other side of his mouth, "unless taxes are too high".

It just has to be the peoples fault...Ya...thats it.

I give you an "E" for effort...

peace...




On Jan 28 11:35 AM John Polomny wrote:

> I place the majority of blame on the American people. The government
> they elect is a direct reflection of their values. People want things
> from government but do not want to pay. They elect people to Congress
> that tell them that this fantasy of a free lunch is possible. It
> is interesting that you mention Ron Paul as I got involved in his
> campaign and found very early on that most people are not interested
> in liberty or self reliance. Most people are collectivists yet dont
> even know it and would never admit it. Freedom, less government,
> liberty were rejected by the majority. I heard someone say once that
> people do not get the government they want but the government they
> deserve. It is our values that are being carried out by the pols
> in Washington and the state legislators. Look at California, the
> state is facing a $48 billion dollar deficit yet if you go online
> and read the comments in the California papers the people are unanimus
> in their sentiment that the budget should be cut but that their sacred
> cow should not be gored. America the land where people think it is
> right and correct to attempt to live off their neighbor.

2009 Jan 28 10:28 PM

[know nothing]

Kind of like a ponzi scheme! When revenue is comming in faster than revenue investors are to be paid back everything looks real good, but when investors ask for their money back all at once it exposes the ponzi scheme. Now Bernnie Madoffs uncle is going to experience much of the same pain Bernie went through, except Uncle Sam has his own printing presses. it will be interesting to see how many suckers will be dupted by Sams scheme?

2009 Jan 29 11:04 AM

[flow5]

What does the ratio government debt have to do with GDP??? Do foreigners purchase a corresponding increase in treasuries compared to increases in GDP?

2009 Jan 29 11:59 AM

[perceptions_now]

Yes!!!

2009 Jan 29 08:05 PM

[Dave Wrixon]

Being a reserve currency actually makes you more vulnerable. It just means you have more creditors to queue up and knock on the door, asking for their cash.


On Jan 29 11:04 AM know nothing wrote:

> Kind of like a ponzi scheme! When revenue is comming in faster than
> revenue investors are to be paid back everything looks real good,
> but when investors ask for their money back all at once it exposes
> the ponzi scheme. Now Bernnie Madoffs uncle is going to experience
> much of the same pain Bernie went through, except Uncle Sam has his
> own printing presses. it will be interesting to see how many suckers
> will be dupted by Sams scheme?

2009 Jan 30 12:15 PM

[PainfullyAware]

You Sign - Peace; Yet you attack and argue Labels.

Labels have emotional connotation and preconceived notion that bend the discussion.

You should argue points of contention rather than engage in supposition of alignment.

The Media bent perception has great influence for the weak minded. Those who give into the "My Team Vs. Your Team" paradigm abandon the ability to rationally discuss.

To Assume Benevolence Is Foolish.

The Complexity Of Corruption Is Vast.

Substance Over Symbolism.

When you do not look at action and put faith only in words you allow for foolery and misconception. The conduct of those in Washington are representative of "The Money Party" or "The Corruption Club" and they do not act in the best interest of the collective.

You should read some of the legislation that has been passed recently; Limitless power, Oversight with no recourse, Included Pork to buy votes. Things are not so rosy as the media would portray.

With Knowledge Comes Sorrow.

Reality Will Be Reality Whether Believed In Or Not.


On Jan 28 10:28 PM randy123 wrote:

> Yes... Blame it on the American people that they have to pick one
> of the politicians put in front of them by the media.
>
> You sound like a corporate republican. It can't be the criminals
> using lawyers and lobbyists to create loopholes in legislation that
> allows them to "escape" the "highest corporate taxes on the planet".

>
>
> You sound like a two faced republican who out of one side of his
> mouth shouts "Country First" then whispers out of the other side
> of his mouth, "unless taxes are too high".
>
> It just has to be the peoples fault...Ya...thats it.
>
> I give you an "E" for effort...
>
> peace...
>
>
>
>
> On Jan 28 11:35 AM John Polomny wrote:

2009 Jan 30 02:25 PM