Saturday, November 07, 2009

The National Debt an Interest Only Loan

The good news is that the country can still afford to pay the interest on the national debt. Notice that it is also figured as a percent of Gross Domestic Production [GDP = private consumption +gross investment + government spending + (exports-imports)]. So as a percent of GDP, you have the ratio Debt to GDP. It kind of obfuscates the dollars and cents/sense.

The red check mark at the bottom of the chart points to the sentence; “The United States ranked as the 23rd-largest in the world as a percentage of GDP. It gives the reader the warm and fuzzy idea that 22 other countries are messing up worse than the US.

Here we are with visual aid number two. This shows standings according to public debt as a percentage of annual GDP. Japan is almost at the top, beaten out by the small country of Zimbabwe. Take your pick of whose figures work best for you. No surprise here, the US is way down the list, just like the claim from the chart above.

Look at the next chart below. Here the countries are listed by the dollar amount of external debt. The US is at the top. This is where you ask the waiter for your check and choke. What happened to Zimbabwe? Note that Japan is a special case. They have 7 trillion in debt but most of it is internal.

The last chart is more or less a financial report card for the major world players. Ireland looks like is has run out luck. As long as interest rates remain low, these governments can keep the punch bowl full.

Take away Australia, Hong Kong and the US, and the rest are members of the European Union that is tied to the Euro. Some of these countries have real good health care plans. It looks like it just gets put on a "bar tab" AKA National Debt.

Right now the US government doesn’t even have two pennies to rub together and they are busy printing money to stimulate the economy. By god, everyone will have a home, a car and health care ("A chicken in every pot and a car in every garage" sounds kind of familiar--Hoover comes to mind). Worry about getting a job after the handouts stop! Congress is in too much of a hurry to spend the country out of this “Recession.” It’s a little like dropping a frozen turkey into a hot deep fat fryer. You mise well attach a radio beacon to it, so you can track it, after lift-off.


Sackerson said...

We need some way of measuring this debt business better. If you reorder the debtors according to debt as % of GDP, you get Monaco and Switzerland in the top four. There's got to be a way of factoring-out money held on deposit for foreigners, or invested for them, as opposed to owed in other ways.

dearieme said...

Surely you need to compare debts to the assets available to clear them? The US government owns huge acreages of western land, doesn't it, plus presumably the minerals under them? Sell the land to pay down debt.

Jim in San Marcos said...

Hi Sack
I agree, there are too many ways to measure the debt Public, External and Internal. It makes you head spin. Then you mix it in as a percent of GDP--mix and match until it looks good.

When we die, our personal debts are wiped off the books. Government debt is inheritable, we all pay the interest on the debt in taxes.

If interest rates were to jump to 10% the game could end unexpectedly. It's not really a question of "if" but rather one of "when."

I listened to your PM Gordon Brown a month ago. He seemed very aware of the implications of increased government spending, something unheard of on this side of the pond.

Thanks for dropping by.

Jim in San Marcos said...

Hi Dearieme

The real question is "Sell the land to whom?"

In California more than half of the land is government owned. 90 percent of the population lives on 15 percent of the land.

The state would love to sell the land, and get it on the tax rolls.

The government in a way considers the public improvement of the land with infrastructure (hospitals, roads, etc) as the collateral for the national debt borrowing.

As far as selling mineral rights, it use to be, if you discovered minerals on Federal land, you could patent a claim for about five dollars an acre and the minerals were yours to sell. That part is being changed right now.

Anonymous said...

Jim this is really bad news for Europe. Granted our TOTAL DEBT:GDP is about 375-400%, but Britain's external debt alone is about 400%. Them and those above them are really screwed. I would also imagine the numbers for ALL of the European countries must be bad, because whereas the individual level consumers may not carry much debt, European banks are way more leveraged than American banks. So while I may not agree with the "we are screwed, they are screwed worse" mantra, I think Europe and the US are ultimately going to be in very serious financial/economic problems, which will ultimately translate into political instability and possibly revolution. These levels of debt have historically never resolved themselves without some form of very negative social upheaval. My only question is whether it takes 1 year, 2 years, 5 years, 10 years, or more. What are your thoughts?

Anonymous said...

As a continuation. I think the UK is going to be the hardest hit of all countries. North Sea oil declining. Financial sector permanently hobbled. External debt of $12.7 Trillion (375% of GDP). US External debt is about $13.8 Trillion and 100% of GDP. Total US Debt:GDP = 375%. The UK is in serious trouble. Serious

Anonymous said...

Not to worry. With Socialist governments on symbolic currencies, with central banks overstepping their bounds and involving themselves in government policy, we are now in unchartered territory. They could float all of this for another 10-20 years.

Jim in San Marcos said...

Hi Anon 8:15

I think that the European Union will be the first to fall apart. Last year I was suggesting that the Euro currency's days were numbered. Italy, Greece, France and Portugal are basket cases.

Great Britain will survive, they can print money just like we can. The Euro Union can't.

Even with North Sea Crude prices dropping, it cost about 50¢ to pump a barrel--they aren"t losing money on the deal.

As for a time line, I would think less than a year, but your guess is just as good as mine.

Thank you for your comments

Anonymous said...


I would also include Spain in that category.

The problem for the UK is that they are now net importers, where they were net exporters up to a few years ago.This was a source of revenue for the country. It is now gone.

As to you next point. Yes, the UK can print money, but if you think they can print money and survive then you are sorely mistaken:

1) They are on the far end of the natural gas pipeline from Russia

2) They do not have the reserve currency. They will suffer inflation and a currency crisis if they continue. Their debts are mostly not denominated in Sterling. Eventually, interest rates in the UK are going to go way up.

2) As I have noted they have over 400% in only external debt. They are one of the most indebted nations on the planet. If you think the EU is screwed, then logically the UK is in a worse spot. They cannot monetize their debt in the way the US can, and even they will not be able to extricate themselves from their debt problems through monetization.

Conclusion: The UK has no catalyst to keep them going. They ARE going to suffer one of the worst debt crises of all countries on this planet.

Honestly, there is NO bullish argument for the UK. They are toast. Period.

Anonymous said...


You are the first and ONLY person to make a bullish case for the basket case in England. Oh, and the Welfare state Scandinavian countries? Toast. All those bad debts in Eastern Europe, high debt levels themselves and those expensive welfare states are going to be a serious problem for them. The US and Europe are in very serious trouble. People just don't realize it yet.

Poly said...

What I found most amusing is the implied future growth of U.S GDP in chart 1. Looks as if the estimate is calling for a 30% increase in GDP over 5 years, remind me again where exactly this growth is coming from?
But hey, don’t be alarmed with the $1T per year spend rate, we can more than afford it……as demonstrated our debt per GDP is VERY stable. :)

Anonymous said...


So basically the whole world operates like a giant option ARM mortgage. Just keep refinancing every year to infinity and beyond. Maybe we can indeed put off this economic melt down until the next ice age................

rob in ns

AIM said...


We just don't know when,and will never know when, until it hits (because there is too much manipulation and intervention going on in the system).

The only thing anyone will have going for them is the ABILITY TO EARN. Meaning... you can create services and goods that people will NEED (not want) in the future decades.

Jim in San Marcos said...

Hi Anon 11:41

Your right I missed Spain.

I disagree with you about Great Britain.

There are three reserve currencies in the world; the dollar, the British Pound and the Euro. Both US and GB can print money and inflate their currency. You can't do that with the Euro. In theory you can, but if you insert nationalism [The Germans aren't going to subsidize the "lazy Italians" or the "welfare loving French." ] These nationalistic tags will sooner or later wreck the Euro, because of this, they are prevented from printing Euros.

So as long as the US and GB can make the interest payment on the debt there is no problem.

If you take a worse case scenario that the US and GB currencies collapse, who has lost money? The US and GB borrowed and spent it. It is the people who loaned it that are toast and that is most of the third world.

I look at the % of GDP values as an insanity rating on the people loaning the money. The current interest rates tend to support my theory;>)

The reason so many people in third world countries invest in the dollar, pound and Euro, is because of the instability of their own country's financial banking and government corruption.

Being a debtor is not a bad thing, being a creditor can have adverse effects upon your future. Just ask Bernie Madoff's investors.

The major effect of a monetary collapse could be third world starvation, not a pretty picture.

Thank you for your comments.

Jim in San Marcos said...

Hi Poly

The thing I find most fascinating is that the Congress can spend it, without regard as to how they are going to fund it.

They should have to raise taxes to do it, maybe that's what this health care bill is all about.

Thank you for your comments

Jim in San Marcos said...

Hi Rob in Nova Scotia

I think you're right,it can be just like an ARM. The trouble is is when the interest rate resets. If it hits 15 percent, the game is pretty much over.

I just read where a millionaire borrowed 50 million at 2 1/2 percent. It makes you wonder about the reality level of the banks. There is no room for common sense, go figure!

Jim in San Marcos said...


I see health care retirement homes as being a sort of commodity for the future investment. Unfortunately, with a monetary collapse, these people would not be able to pay for their care any longer.

In paraphrasing you, "ABILITY TO EARN" and I will add "youth" will get you through this AOK. If you are 55 or older, there are far more questions than answers. As we age, we have fewer and fewer options.

Growing old under the shade of uncertainty is not soothing to the nerves.

Anonymous said...


If the health care bill gets through congress, do you believe Ron Paul's assessment that the dollar will drop further?

Anonymous said...

Jim - At 4% of the worlds reserves, I wouldn't exactly call the Pound a reserve currency. Certainly, not a major one. I am just going to have to agree to disagree and let time pass, whereupon Britain will implode and we'll know what is what.

Jim in San Marcos said...

Hi Anon 9:53

We might both be on the same side of the argument.

A reserve currency is what international traders use as a medium of exchange. The US is 64%, the Euro is 26% and as you mentioned the pound sterling is small 4%. The Euro has only been around 9 years and if you total up the debt of the EU as a group, it is over 30 trillion. They can't print Euros unless all parties agree. I don't think that will happen.

What I was referring to, was that in times of stress, the astute investor will move their savings to the most secure havens. Over the last 300 years Great Britain has never hesitated to be a lender of last resort and the US has also assumed that stance since the end of WWII.

If you want to buy insurance, it will be quoted in pounds, if you want to buy oil, it will be quoted in dollars.

Being a lender of last resort, the country has to be able to print money and people have to be confident that their investments are safe. Great Britain, Switzerland and the US have been around for hundreds of years. They know how to play the game.

If the EU was to collapse, it would spell the end of the Euro. From there, interest rates would rise and the world would demand more than printed paper for their labor.

A neat way for the survivors to devalue their national debt would be to back their currency with gold say at $5,000 to $10,000 per ounce. That might be far fetched, but the last sale of 400 tons of gold to India has me wondering. Why trade gold for paper money?

Anonymous said...

My humble opinion:

It will be a long time before the USD is replaced by another reserve currency. The USA's past stature in wealth and power locked the USD in solid as the reserve currency. Who could possible unseat it? It took the pound close to 70 years before it finally lost the honor of reserve currency. The USD is much more deeply entrenced as the reserve curr than England ever was. The grumblings that you hear from China, Russia, Saudi's, Brazil, etc. are just that... grumblings. It will take a long time for sovereign nations to unwind from and get all those USD out of their coffers and become used to another reserve. Plus, it is now a growing global economy and only the USA has the volume of dollars necessary for global trade. We are still the biggest economy on the globe and will remain there for some time. Empires are slow, cumbersome entities and die slow deaths.

Yes, USD purchasing power will continue to diminish for Americans. That is the plan to handle the trade deficit. The Fed Res won't go into hyper-inflation though... the banks are already hoarding cash so they can stay afloat when the future crisises hit (more foreclosures in comm and res real estate; credit card, auto and home equity loan defaults, derivatives, etc.). They already have enormous toxic and non-performing assets on their books (that they are currently hiding). Do you think the Fed Res would severely inflate and destroy all of the extant loans that the banks have out? It is obvious that The Fed/Gov/Congress are all about protecting the bankers and not "we, the people".

Be prepared for the next 10+ years to be very similar to Japan's last 20 -- a series of recessions and recoveries that move on a flat or slightly downward trend, not much growth to speak of -- it will be a long time before most Americans realize that they HAVE been, ARE in and WILL BE in a depression for some time.

It's unnecessary length will be due to the Fed's and Congress's foolish, desperate and mis-guided solutions.

I don't advise that anyone buy a home. Prices will be 20% lower within the next 3 years. Wouldn't be long in stocks... they'll be crashing down within a year. Bonds and other debt vehicles... puny yields, for a long time. Plus, rising taxes and inflation will put the final nail into the coffin of stocks and bonds.

No where to run folks.

It's gonna be a new world.

Gonna be challenging.

Anon on a California Mountain

Anonymous said...


The turkey analogy is great and best bird to describe current government policies....... We know it isn't going to fly so do the people in charge.......


Jim in San Marcos said...

Hi Anon On a California Mountain

Your comments fill in the blanks I didn't cover. Nice work!

There is more material in the comments than in the original post. That's got to be a good thing. The pieces are starting to fall into place.

Thanks for dropping by.

Jim in San Marcos said...

Hi Rob

Glad you liked it.

take care

Jim in San Marcos said...

Hi Anon 12:04

If the health care passes, things become extremely difficult for employers.

The dollar could drop, but most other world currencies are in just as bad a shape as we are. I don't see a clear answer here.

frakrak said...

What if your government pinned the dollar back to the gold standard again?

Hoover, after legislating against private ownership, offered a buy back price about 30% below the then current market price!

The U.S. is still the major player in gold, it dwarfs its nearest rival by about 6,000 metric tons.

If Obama was really needy he could offer 50% below market price, and in return you would get some very warm, crisp dollar bills!!

Jim in San Marcos said...

Hi Frakrak

It was FDR in May of 1933 that banned US ownership of gold with a $10,000 fine and or 10 years in jail. They bought it for $20 and revalued it for external trade at $30.

I've often hinted at going on the gold standard, but in the end it wouldn't work. With a real gold standard you can only spend what you bring in in taxes. The minute you print too much currency, there would be a demand for gold instead of the dollar. That happend to Nixon in the 70's when he had to close the gold window.

I don't think we can put Congress on a budget, they would never get re elected. A government detached from the gold standard can spend to their hearts content.

I think we are both right in suggesting that what we have now isn't working very well in a global sense. Something will have to change.

AIM said...

Don't think a gold standard could ever work again. There isn't enough of it. A mixed basket of commodities including gold could work (gold, silver, agricultural commodities, etc.) Weaning a country off of a symbolic currency is probably impossible at this stage of frankenstein economics. The Keynesians and monetarists have basically obliterated all other economic models. All generations alive today in the USA have never witnessed classic or Austrian economics or any semblance of common sense in fiscal/monetary policy.

All I can say is that once all the stimulus, bailouts, interventions and "extend and pretend" stops we are going to have a crash that will make all prior crashes look like little sneezes. The postponement will have a grave multiplier effect and the pain will be awesome.

Obama or whoever is president will be totally occupied with making the crash as orderly and slow landing as possible. Like a doctor bringing a drug addict down through withdrawal.

Jim in San Marcos said...

Hi Aim

I too have heard the phrase, that there isn't enough gold to use as a backing for a currency. I think the only thing true about it is enough people repeat it and accept it as fact. I am skeptical, there has never been enough gold and silver in this world and there never will be. Gold keeps politicians honest.

If the every country was to mint one ounce gold and silver coins, they would have the same value world wide. The country of origin would have no significance. You have to admit governments are not coining it, they are hording it. The question arises what if it was all turned into coinage?

It would be great for bankers, your loan would be payable in units of gold, so if the currency went South, your loan wouldn't. Investments would be quite secure.

Of course if the value of the metal increases above it's indicated net worth, then it disappears from circulation. This happened with silver in the 1960's. It was bought, melted down and sold as bullion for a profit. Bad currency always chases good currency out of circulation.

6 years ago a home was a path to riches. I didn't believe that. Now they say we are in recovery mode and I don't believe that either.

I agree with you, this is going to get a lot worse.

There is one wild card, the states can call for a Constitutional Convention to rewrite the fabric of our government. Envision what could happen if that was to come about. If you really think about it, everyone doesn't need the American dream of home ownership. If only land holders were allowed to vote, that might solve a lot of problems. Right now you can vote even if you you don't have a pot to piss in. Responsibility is another word for home ownership. We need more of it.

Lets push for that Constitutional Convention.

Sackerson said...

Wasn't the Reichsmark linked to land?

Jim in San Marcos said...

Hi Sack

You're right, it was linked to land, Germany had no gold. After the hyperinflation, they used the land value to issue a new currency and it worked.

I guess there is still hope for us, we have plenty of Fannie Mae and Freddie Mac real estate to lean back upon/--that should be good for a laugh.

Take care and thanks for dropping by.

AIM said...

If I were Emperor of the USA their would be a new USD backed by a mix of tangible assets (gold, silver, rare earth minerals, oil, land, GDP, agricultural produce, exports etc.)

It would have substance and meaning. And it would be viewed as strong or weak based on our continued production and our preservation and maintenance of the assets. And it would be the world reserve currency.

And of course we'd be a creditor nation; a producer nation; (I'd stamp out the term "consumers" when referring to citizens). Government would be small and only tend to basic infrastructure, basic regulation and defense. Out foreign military bases would be dismantled and we'd stop being the police of planet earth. And our children would learn through the new non-government school systems that it is hard work, saving and smart investing that is the way to prosperity.

Long live Emperor AIM!

Jim in San Marcos said...


I don't know if we need to send you to see the Wizard or have you click your heels three times and visit Kansas.

There is no problem making government bigger, its when you want to make it smaller . . . .

I wonder about " And our children would learn through the new non-government school systems that it is hard work, saving and smart investing that is the way to prosperity." Everyone out there right now, is attempting to get rich fast. Right now they are disappointed and are grasping at straws. Hard work could be a real wakeup call for for the masses.

Education wise, our kids will learn the "hard work" ethic from us. I have a quote on my desk that reads "The easiest way to teach your children about money is for you not to have any."

The next few years could be very painful for some of us.

Anonymous said...


Great comments, as usual.


Interesting thoughts. The schools, however, have been going downhill for years. Are you willing to wait the 12+ years before one of your properly trained kids pops out the other end?

Tyrone said...

Enjoy, Jim.

Compare your State to California's Debacle

Time Lapse Unemployment: Counties of the USA

Jim in San Marcos said...

Hi Tyrone

Thank you for the links, they are both excellent. The time lapse for unemployment doesn't leave you with that warm and fuzzy feeling.

The first link on state standings was a real eye opener with the "size of budget gap" and the "change in revenue."

When you hear the quote "We are not out of the woods yet," and see smoke everywhere, now is just not the time to be buying firewood.

frakrak said...

Thanks Jim for your previous response, and for your corrections! Attribution to the facts is very important.

Found the U.S. Federal Reserve Board website interesting re the debate on the gold standard. A speech by Alan Greenspan is quite interesting and appears to be sympathetic to reinstatement of the standard (2002), and it is delivered not in his characteristic "Greenspeak".

Bernanke on the other hand sustains the other view in a speech delivered in 2004. But I would understand anyone's hesitance in reading this!

You seem to be on the money re the E.U. Apparently France is copping a lot of flack by member nations for not reigning in its burgeoning public deficit! And are calling on France to act urgently, the French of course are unmoved and resistant.
cheers from

Jim in San Marcos said...

Hi Frakrak

I look at the Euro as a very strong currency, but at the same time that is it's biggest fault.

They need to print money like crazy to keep up with us and the EU says no.

Something has to give.

Anonymous said...

If you add unfunded liabilities (government employee/military pensions, Social Security, Medicare, etc.), the U.S. has about $500,000 debt+unfunded liabilities per capita. I don't know if Ireland is worse off or just being more honest about their debts.

The U.S. takes in about $1.6 Trillion in income tax revenues. If we doubled taxes, cut services to avoid adding to the debt, and kept low interest rates, we could fund the unfunded liabilities and pay off the debt in about 50 years. The upper middle class wouldn't mind paying 70% (federal) taxes anymore than the middle would mind 50% taxes, right? If California doubled their taxes, we could provide welfare services to help the formerly wealthy live on the 10% they get to keep.

Eh. That will just tick off the hordes. Fuggedaboudit. Let's give people downpayments on houses and free healthcare. That will show them we love them and deserve their votes. Screw the grandkids.

Me, I think a garden and a chicken coop is a nice hedge agin' inflation. Oh, wait, the gov. is trying to create a complex and expensive registration system for all farm animals, including ones raised for personal use. Lets all go vegan and raise been sprouts on a windowsill.

Anonymous said...

WRT reserve currencies... I see frightening parallels between the U.S. today and the U.K. circa 1920. Us Americans forget that we used to be an uncivilized little backwater, with nothing going for us but lots of land, some natural resources, and hardworking people. Kind of like China today.

There were energy and technology issues at play in the U.K.'s downfall. The rest of the world was transitioning to oil, but U.K. was entrenched in coal, and out of it. Electricity is a little easier to shift from oil to nat. gas to nuclear/solar/hydro/wind, but our infrastructure and culture is built on driving trucks full of goods from place to place and putting 1 person in a car and sending them on a 30-mile commute. Europe is better poised to transition to expensive oil because they built their cities pre-car, around walkable cities and then added transit. So if expensive imported oil becomes our equivalent of expensive imported coal, we have a serious risk of becoming so energy-irrelevant that our wealth and stability advantage no longer justify using our piles of paper as the world's reserve currency.

I hope desperately to be wrong here. I care about equality for all people, and a loss of American prominence is just an opportunity for the people of another nation to gain stregth, but I love my fellow Americans more than I love the rest of the world. Even if I want to smack them for putting more thought into how they'll vote on American Idol than the put into how they'll vote on bonds, schools, pensions, and various elected officials.