Record Debt Level
Yep, that is the other story linked at the top of Drudge today. Basically, another story of how we’ve supposedly hit a record in terms of national debt. In nominal dollars its true. But there have been periods when that debt was higher when measured as a ratio of GDP (during WWII the debt went over 100% of GDP). So is it a record? Yeah, kinda.
Now that being said, I do think the rapid increase in national debt and the projections that the rate of increase isn’t going to slow much and that national debt will rise from 41% of GDP to around 80% of GDP is problematic. After WWII there was a general consensus that the debt had to be paid back down to a reasonable level. If you were to graph national debt as a ratio of GDP you’d see a steady and rather rapid (by today’s standards) decline. That consensus doesn’t seem to hold today. When Dick Cheney famously said, “Deficits don’t matter anymore,” not many seemed to realize that this mindset held for not just Republicans but also Democrats as well.
There is the risk that the buyers of U.S. government debt might not find it as attractive an investment as they once did. Just a few years ago the prospect of U.S. national debt rocketing up to 80% of GDP would have been unthinkable. Now we are hoping that we hit 60 or 70% and stop there. What could then happen is that the U.S. government would have to offer the debt at a higher interest rate. This would then start to crowd out other investment. If the government offers debt at 2.5% interest (made up number) and private investments that have higher risk offer debt at 4.5% (another made up number) then there might be buyers for both. But if the government offers its debt at 4.5% and is percieved to still be of less risk than the private debt, nobody will buy the private debt.
This could reduce future growth rates. When I look at the projections by Obama’s own economic team and then hear him say, “I’m not expanding the size of government just to expand the size of government,” while probably true, I think it is also safe to say that Obama sees a much larger government as necessary. Obama’s view is that more government is better than less government.