We've heard it before: "America has too much debt." This has
been the common theme since Obama took over in 2009, and the
sentiment persisted through the 2012 election. It continues to
However, people spouting off about
may not know both sides of the story. The idea about having too
much debt could be flawed because a high debt balance isn't
always a bad thing.
I was pleased to read a report from
titled, "America is Not Drowning in Debt," which debunks many of
the hyped myths circulating about America's "crushing" debt
The first chart from their report shows the current debt balance
(private, financial, government, etc.) as a percent of GDP. At
first glance, it looks frightening. Not only is the debt-to-GDP
ratio greater than 350%, it's also well above historical ratios.
After looking at only the chart above, you'd be right to think
that America is in trouble. GDP is equivalent to income. So the
U.S. owes more than three times as much as the country earns each
year. If GDP were to decline - as it nearly did in the fourth
quarter of 2012 - that ratio worsens.
Capital Economics noted that we're also seeing a declining return
from that debt. From 1960 to 1980 debt increased by $3.9 trillion
and GDP increased by $2.4 trillion. So, $1 of debt had a $0.61
impact to GDP. From 1980 to 2000 debt increased $20.7 trillion
compared to GDP growth of $9 trillion - $1 of debt translated to
$0.44 GDP. Finally, from 2001 to 2011 debt increased by $27
trillion while GDP expanded by $5.2 trillion - $1 in debt
resulted in $0.19 of GDP.
We're taking on more debt, and that's not causing a similar rise
in GDP. In fact, GDP is decelerating while debt growth is
accelerating, although both are growing.
So why am I not concerned about America's mountain of debt?
First, the country transitioned from a production economy to a
services economy, shipping most of its production overseas. But
it still maintained its love of debt. So the new debt has gone
toward consumption as opposed to capital investment, which dings
GDP growth because equipment and inventory builds occurred more
often outside of the U.S. Low interest rates have exacerbated
this trend because higher returns are more easily achieved
Second, a large debt balance shouldn't be a concern. Debt is only
a concern if you can't pay it. And even ignoring our ability to
always pay debts by printing new money (something S&P ignored
in August 2011), the U.S. government is incredibly solvent.
Consumer and corporate defaults are also under control.
Furthermore, total assets are 1,300% of GDP and net worth is 550%
of GDP. That net worth ratio is also near the top of a 60-year
Let's get a better grip on reality. The U.S. is fine so far as
total debt goes. Politicians that hammer home the "too much debt"
argument are drastically misrepresenting the current situation -
doing it to their gain too, nonetheless. In fact, we could very
easily increase our total debt balance without harming the
ability to pay it because our assets are so much greater than
New debt should be no problem. How America spends its money?
I'll be the first to admit, that's a completely different