Sunday, November 23, 2008

The crushing weight of debt

US GDP is estimated at $14.3 trillon, and the Chinese article referenced in my post yesterday calculated total debts to be $68.5 trillion. The average interest rate on Federal debt in October was 4.009%.

So if that interest rate applied to all debts in the US, it would equate to 19.2% of GDP. In other words, $19.20 out of every 100 dollars earned simply pays interest. But private borrowing costs more, so the real burden is even greater.

Worse still is the fact that debts have been rapidly increasing for years. A study by the Foundation for Fiscal Reform calculates that debt-to-GDP rose from 249% in 1983 to 392% earlier this year, an average increase of nearly 6% (of GDP) per year; actually, accelerating faster than that in the last few years.

So merely to go no further into debt, plus paying interest without ever repaying capital, would cost at least 25% of GDP. And if there were (please!) a plan to abolish all debt by the beginning of the next century (92 years away), that would add another 5% or so, bringing the total national debt servicing to 30% of GDP.

Having got to this breakneck speed, there is no difference between stopping and crashing.

I suspect there simply must be debt destruction - either slowly, in the form of currency devaluation, or quickly, in debt writeoffs and defaults.


James Higham said...

Says it exactly, Sackers. On a micro level, that is why I have only savings accounts and fund managers. No credit cards at all.

Sackerson said...

Thank you, James. But what to do if, as seems plausible, they choose the inflation route? Beans and bullets?

Old Prof said...

I have beans and bullets, plus my own water and heat.

Sackerson said...

A diet of beans + peanuts = bullets.

dearieme said...

A society based on the welfare state, the universal franchise and a fiat currency will get itself into a condition where it is too vulnerable to economic shocks - it is unsustainable. Now what?

Sackerson said...

Perhaps a society whose authorities begin resiling from the first two while exploiting the third?