Thursday, March 26, 2009

Here We Go......Into The Debt Jungle

Before we dive into this topic, I would like to review a few things. The above table tracks the Debt of the General Fund for the last 35 years or so. After perusing the data (please click on table to expand), it is easy to dispense with the typical political name calling. This is not a political issue anyway, it is a question of a sustainable monetary and banking system. The numbers for the Obama presidency are my own estimates.

The growth over time is substantial. This is only one side of the issue though. For example, private companies often borrow money as a standard means of operating. The key for the lender is whether or not the borrower is making money and has stable operating margins. This is a simplified analysis, but the point is that borrowing can make sense.

The above table tracks the Gross Domestic Product (nominal terms) of the U.S. You will notice that, at best, GDP was growing as fast as the debt. GDP is a proxy for the revenue of the Federal Government since it gives us an idea of the potential tax revenue. If the economy is growing, corporate income tax receipts rise and personal income tax receipts rise.

This is the problem: the ratio of debt to GDP has increased from 33.2% to 69.6%. If my projections are on target, the ratio will rise to 88.2% by the end of Obama's first (only?) term. This is why China and other creditors are making noise about the fiscal position of our country. How can we pay off the debt if the tax base is losing ground?

After further analysis, we will see that the following identity exists in our monetary system: money = debt. Hence the current paradox. The market doesn't want more debt, but more money is needed to promote growth.

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