Quote of the Day:” Now it all should get finally get done, thanks to Congress’ willingness to spend money it doesn’t really have. But we might as well drive the nation to bankruptcy court on smooth roads.” Nolan Finley on the potential passage of the Infrastructure Bill by Congress.
Yesterday I expressed my concern about the U.S deficit and debt levels that have grown like crazy since 2008. I said that better minds than mine will figure out what to do. As you can see by the above quote from Nolan Finley, I am not alone in my concerns.
In 2008 our national debt was 68% of our GDP (Revenue). In 2020 it had grown to 108%. In other words, our total debt is greater than the amount of money we bring in during the year. That is not so bad as many new families buy their first homes with mortgages up to 250% or more of their annual income. As long as the principal and interest payment are less than 25% of their gross revenue banks will gladly loan them money. Under this scenario, it doesn’t appear to be a major concern other than the fact that it is growing exponentially.
Why am I still concerned? I then decided to look at interest rates versus inflation. If interest rates minus inflation (real interest rate) is within a range of 3% or less, it is not a major problem. In the last 10 years this number has been well below 3%, with some years even being below 0%. OK, no problem, but I am still concerned. Buy why?
I started to look at the annual deficit as a percent of GDP (Revenue). In 2020 the deficit was 15% of GDP, which means we spent 15% more than we took in. Ok, that was a pandemic year. In 2019 it was 4.6%, it was 9.7 in 2009, a post-recession year. You have to go back to 2001 to find a year when we actually had a surplus of 1.2%. I guess this explains why our deficit has grown so much in the last 20 years. It was in 2008 that the Tea Party movement started because of the concerns about the growing deficit. This growth has me nervous.
So why am I still nervous? I remember now!
I actually lived in years when the economy wasn’t booming, inflation was out of control, and interest rates were as high as 16% for conventional mortgages. In 1980 the federal interest rate was over 18% while in 2020 the federal interest rate was 1%. In 1980 the federal annual interest payment was $108 billion. In 2020 the annual interest payments were $534 billion. In 2020 we paid 5 times more interest than we did in 1980 when the interest rates were 18%.
The result of my analysis. Don’t worry, be happy as long as interest rates, inflation, and the economy are running at their current levels. However, If the period of 1970 through the mid-80s is ever repeated there will be hell to pay. As the old saying goes, “If you don’t pay attention to history, you are bound to repeat it”.
Stay safe. Social distance. Wear your mask. Wash your hands regularly. Get your vaccine.
Orchid of the Day: The Internet. It sure does make research easier than going to the library and looking at microfiche.
Onion of the Day: Governor Mario Cuomo. No explanation necessary.
And before microfiche there were the index cards to find the books to do your research. 🙂