More On: US Government's Debt
The US Government's Debt-to-GDP Ratio Is Worse Than Greece's Before the 2008 Financial Crisis And It's About to Get Worse
The United States has entered unknown debt territory. That should be concerning to us.
Before a joint session of Congress on Wednesday, President Biden proposed a fresh proposal to Americans: more spending.
The $1.8 trillion proposal, which was unveiled only weeks after Biden signed a $1.9 trillion COVID relief bill into law, includes "free" community college for all three and four-year-olds as well as universal preschool for all three and four-year-olds.
According to The New York Times, "Mr. Biden may herald in a new era that substantially enhances the size and influence of the federal government."
How Much Debt Is Bearable?
The news comes months after the Congressional Budget Office projected a $2.3 trillion deficit in 2021 in a report.
The deficit will almost surely worsen under Biden's approach. Despite the fact that the plan includes numerous tax hikes to pay its initiatives, experts predict that the levies will fall well short of government spending.
In a recent NBC News report, Joshua Jahani, managing director of Jahani and Associates, stated, "The rules of economics are more rigorous than the laws of the federal government, and these tax rises are unlikely to generate the windfall Biden hopes."
As a result, the nation's $28.2 trillion debt will grow even faster. Worse, the debt approaches $120 trillion when unfunded obligations are reflected in the balance sheet, as private corporations are legally compelled to do.
It's unclear how much danger these responsibilities entail.
There's a school of thinking that says these loans aren't a big deal. After all, a government may theoretically keep rolling over its debt indefinitely. However, economist David Andolfatto pointed out in a recent piece for the Federal Reserve Bank of St. Louis that the government does not ultimately decide how much debt is acceptable. That is what the market does.
“There is presumably a limit to how much the market is willing or able to absorb in the way of Treasury securities, for a given price level (or inflation rate) and a given structure of interest rates,” Andolfatto wrote. “However, no one really knows how high the debt-to-GDP ratio can get. We can only know once we get there.”
A Dangerous Level of Debt?
Andolfatto is correct in asserting that no one truly understands the debt tipping point. However, the US debt-to-GDP ratio, which measures a country's debt in relation to its yearly economic production, was 129 percent by the end of 2020. To put it another way, the official US debt was roughly a third the size of the US GDP.
That's a lot higher than Greece's debt-to-GDP ratio in 2010, when it got a bailout from the International Monetary Fund to avoid defaulting on its debts.
The United States is not Greece, of course. Its economic potential is far greater, and it is operating under a currency it controls. But there’s no denying that the US is in uncharted territory. Today, the federal government debt-to-GDP ratio is higher than it was at the conclusion of World War II, when the nation assembled one of the largest armies the world has ever seen. Perhaps even worse, the government is piling on debt faster than ever.
Eventually, as Andolfatto notes, the market may very well decide enough is enough, and the demand for Treasury securities will dry up. Indeed, this is likely one reason cryptocurrencies are suddenly flourishing.
Cryptocurrencies have gone from being debated in the corners of Reddit communities and university lounges to a market worth more than $2 trillion in what seems like the blink of an eye. It's no exaggeration to say that cryptos have gone mainstream, with hedge firms and high-profile sportsmen signing multi-million dollar deals.
It's not difficult to understand why. The stock market is hedging its bets. Many people are looking for a way out, as if they're rats on a sinking ship, recognizing that the dollar's time is running out as its value is destroyed by massive pumping.
Ignoring History?
Author Richard Ebeling studied how central planners in ancient Rome ruined the economy in a famous 2016 piece.
To modern ears, much of what Ebeling describes—debt, enormous expenditure, inflation, and price controls—sounds uncannily familiar. And, of course, Ebeling delves into the age-old conundrum of why Rome failed.
As every history lover knows, philosophers ranging from Edward Gibbon to Peter Heather and beyond have pondered this subject for ages. The responses are diverse. Barbarians are blamed by some, while immigration is blamed by others. Some blamed Christianity, while others blamed sickness or the deterioration of Roman legions.
All of these theories are interesting and worthy of examination, but I’ve found no single better explanation than the one offered by economist Ludwig von Mises who concluded Rome’s decay stemmed from its rejection of individualism and free markets.
“The marvelous civilization of antiquity perished because it did not adjust its moral code and its legal system to the requirements of the market economy,” Mises wrote.
He continued:
“A social order is doomed if the actions which its normal functioning requires are rejected by the standards of morality, are declared illegal by the laws of the country, and are prosecuted as criminal by the courts and the police.
The Roman Empire crumbled to dust because it lacked the spirit of [classical] liberalism and free enterprise. The policy of interventionism and its political corollary, the Fuhrer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.”
The American president and statesman John Adams once reportedly said there are two ways nations are destroyed.
“One is by the sword and the other is by debt,” Adams reputedly said. (Though the quote is widely attributed to Adams, it's not supported by written documentation.)
Debt is without a doubt a severe issue. (Ask the ancient Romans or the current Greeks.) If Mises is accurate, however, the debt explosion may be simply a symptom of a much broader problem: the breakdown of the spirit of liberty and the establishment of a regime opposed to free enterprise.
We should take note of one thing the Romans lacked: their gloomy example.
