Sunday, January 7, 2007

Is This a Great Economy or What?

With low inflation (2.2%), near record low unemployment (4.5%), low interest rates, rising personal income, healthy GDP growth and a Dow above 12,000, this may be the best economy we’ve had post-WW II (the late nineteen-nineties mania doesn’t count as it was predicated and evaporated on a false “Tech Bubble” that was created out of a few rules changes at the SEC).

Still, there are detractors who claim that the current national debt overrides those other economic indicators and changes that picture altogether.

I profoundly disagree.

Detractors often claim that our current level of national debt is reckless, irresponsible and unsustainable, saying things like, “If this government were a household, it’d be in foreclosure and we’d all be facing eviction,” implying that our current debt level is much higher than even an average American household could sustain.

It’s easily proven that America’s current national debt is NOT at all high, even by average household standards. Most American homeowners have a total debt (mortgage, car payments, consumer debt) level that is often 300% or 400% of their annual net (after tax) income, with an annual debt servicing cost of around 50%.

By comparison, the U.S. has a national debt of about 66% of its GDP, with an annual debt servicing cost of about 5% of GDP.

Moreover, it’s NOT much higher than that of many other nations.

England has one of the lowest amounts of national debt at 43% of its GDP. Germany’s is 67% of its GDP, France’s is 66% of GDP, Sweden and Norway’s are both slightly over 50% of GDP. Canada’s is nearly 70% of GDP, Italy’s is 108% of GDP, Japan’s is 158% of its GDP and Israel has a national debt of 99.7% of GDP!

Given that virtually all nations have a significant national debt, the lowest I found was England’s (43% of GDP), with almost all the rest over 50%, many, many nations with 60% of GDP or higher, and a fair amount with more than our current national debt of about 66% of GDP, seems to indicate that our current debt level is not significantly higher than that of most other nations! See link to graph above; SEE:

So the charge that our national debt level would be unsustainable for a household, is demonstrably false, as is the view that our national debt is significantly higher or even “out-of-whack” with that of other nations.

Some will then retreat from the debt-level argument to the charge that “households can’t sustain themselves on deficit spending the way the U.S. government has."

Of course that’s very true, and it's completely superfluous argument because it ignores the fact that ALL national governments can eliminate debt in ways that individuals and households cannot – they can print more money, or float more government-backed bonds.

Deficit spending IS bad, but the paltry 5% of GDP that comprises the annual debt servicing cost on our national debt is NOT the reason for America’s deficit spending! No, a government that continues to spend more than it can afford on social programs, education and the military, not to mention all those non-discretionary spending items (Social Security, Medicare & Medicaid, etc) is responsible for that.

But has anything changed recently in regards to our spending more than we bring in?

Is deficit spending and the national debt at all new?

No, they’re not new at all.

In fact, the debt has been rising every year for more than forty years. Thankfully, so has GDP, thus keeping the national debt at a smaller percentage of the GDP than it would’ve been absent that growth.

In fact, recently one critic of the current economy charged that, “Whether you want to credit Clinton, the republican congress of the 90’s or both they were able to reign in the debt over a decade.”

That is simply UNTRUE!

In fact, the U.S. National Debt was never trimmed during the Gingrich/Clinton years (I say Gingrich first, because Congress controls the budget).

They merely reduced the amount of the deficit spending, so apparently the fellow who claimed this confused the deficit with the national debt in THAT statement.

In truth, the U.S. National Debt grew from 1993 (and before) and that’s easily proven by looking at those numbers; (how about back to 1990?)

09/29/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/28/2001 $5,807,463,412,200.06
09/29/2000 $5,674,178,209,886.86
09/30/1999 $5,656,270,901,615.43
09/30/1998 $5,526,193,008,897.62
09/30/1997 $5,413,146,011,397.34
09/30/1996 $5,224,810,939,135.73
09/29/1995 $4,973,982,900,709.39
09/30/1994 $4,692,749,910,013.32
09/30/1993 $4,411,488,883,139.38
09/30/1992 $4,064,620,655,521.66
09/30/1991 $3,665,303,351,697.03
09/28/1990 $3,233,313,451,777.25

So, the DEBT has never been reined in, only the deficit (deficit spending gap) was reined in after Gingrich and company took over Congress.

The National Debt has increased EVERY YEAR.

So has the U.S. GDP.

So the percentage of the GDP of the U.S. debt is still not unmanageable, nor at all “out of whack” for a fiscally responsible country.
In fact our national debt is itself a very complex concept. It's actually comprised of TWO kinds of debt!
According to Donald Lambro, “The problem with the $7.4 trillion national debt number is that it is not a true description of what the government actually owes to its creditors. The real figure is a lot smaller than that because, as a JEC report points out, "not all debt is equal." "

That’s because “there are two kinds of debts.

“There is publicly held debt, which is sold to the public in the form of Treasury bills, notes and bonds, which totals $4.3 trillion, or about 60 percent of our total debt. This is the true debt held by banks, retirees who want a safe, secure investment for their money, along with other financial institutions and even foreign governments.

"Then there is something called government-held debt, which totals $3.1 trillion, or about 40 percent of the gross national debt. This is the amount of money loaned from one program to another within the government. It is essentially debt that the government "owes itself."

"For example, Social Security's surplus revenues are routinely spent by the government to pay other bills in exchange for a Treasury IOU that the retirement fund can redeem when its does not have enough funds to pay all of its benefits (which will happen in about 15 years or so).

"This type of debt is largely an accounting mechanism, and counting it as debt is analogous to counting an IOU to oneself as personal debt," the JEC says."

So is this a great economy or what?

I think, since the charges above, about the current national debt overwhelming the rest of the economic indicators, have proven false, that it is indeed a great economy.

In fact, a great and underestimated one, at that.


RoseCovered Glasses said...

This is a great blog. There is another blogger like you out there who is on the same frequency and has done extensive research. Please see JD at:

For both your benefits I would like to supplement your fine article with a comment on one of the biggest contributors to the national debt.

I am a 2 tour Vietnam Veteran who recently retired after 36 years of working in the Defense Industrial Complex on many of the weapons systems being used by our forces as we speak.

If you are interested in a view of the inside of the Pentagon procurement process from Vietnam to Iraq please check the posting at my blog entitled, “Odyssey of Armaments”

The Pentagon is a giant, incredibly complex establishment, budgeted in excess of $500B per year. The Rumsfelds, the Administrations and the Congressmen come and go but the real machinery of policy and procurement keeps grinding away, presenting the politicos who arrive with detail and alternatives slanted to perpetuate itself.

How can any newcomer, be he a President, a Congressman or even the new Sec. Def.Mr. Gates, understand such complexity, particularly if heretofore he has not had the clearance to get the full details?

Answer- he can’t. Therefore he accepts the alternatives provided by the career establishment that never goes away and he hopes he makes the right choices. Or he is influenced by a lobbyist or two representing companies in his district or special interest groups.

From a practical standpoint, policy and war decisions are made far below the levels of the talking heads who take the heat or the credit for the results.

This situation is unfortunate but it is absolute fact. Take it from one who has been to war and worked in the establishment.

This giant policy making and war machine will eventually come apart and have to be put back together to operate smaller, leaner and on less fuel. But that won’t happen until it hits a brick wall at high speed.

We will then have to run a Volkswagen instead of a Caddy and get along somehow. We better start practicing now and get off our high horse. Our golden aura in the world is beginning to dull from arrogance.

JMK said...

Thanks Ken.

I've added you to my blog roll and will visit regularly and I'll also check out JD's political forum as well.

I think what you say is mostly true of almost all bureaucracies, they seem to move on with a life of their own, like a giant ship that can only be turned slowly by the Captain...and not at all, if he doesn't have the rest of the crew (career bureaucrats on board).

One of the sad things is that those who get entrenched in various bureaucracies begin to see their own best interests as part and parcel of that bureaucracy's best interests and by extension, that bureaucracy's best interests as part of the nation's best interest...and that's not always, or even mostly the case.

Thanks for stopping by and for giving me a lot to think about...and for those links!

Much appreciated!

Blue Wind said...

It is difficult to see the numbers in the graph. Can you post a larger version?

JMK said...

Hi Blue! I uploaded a larger image, but inadvertently left up the smaller one (dumb move), but I didn't want to restart the entire post and lose the comments, so I left'em both and addeda link to the web page that has that graph;

It's an interesting and widely misunderstood concept and one that should probably be better understood by all.

rachel said...

great blog, JMK

JMK said...

Thanks Rachel!

I really appreciate your stopping by.

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