This number has become popular again now that the debt has hit a new high of $8.4 trillion. And of course it’s always been popular with the debt doomsday crowd. I’m sure you know those folks. They’re the ones who have been predicting a debt-driven collapse of the U.S. economy for decades.
Now I’m going to let you in on a little secret: The U.S. debt is tiny. That’s right, tiny. Take a look at this: The $8.4 trillion figure is just 66 percent of GDP, which is far below most countries. In a study conducted by the CIA of public debt as a percentage of GDP, the United States came in at number 38 of the 113 countries listed. It beat out such notable fiscal conservatives as France and Germany. Japan, by the way, came in at number three on the list with a debt-to-GDP ratio hitting a whopping 170 percent. (In case you’re wondering, Uruguay was at the top of the list with a debt-to-GDP ratio of 793 percent!)
But the news gets even better. Of that $8.4 trillion, $3.5 trillion is intergovernmental debt, meaning, what the government owes itself. This doesn’t really matter for reasons I won’t get into now. The remaining $4.9 trillion is the debt held by the public. When you look at that as a percentage of GDP it comes in at a very comfortable and manageable 38 percent, which is well below the post-WWII ratio of 43 percent.
Why is the debt-to-GDP ratio so important? Well, think about it in terms of an individual. For someone making $35,000 per year, $10,000 in debts may be a difficult amount to deal with. On the other hand, $10,000 in debt for Bill Gates would be nothing. Even $10 million in debt would be nothing. Bankers use the debt-to-income number all the time, to help determine how much someone can comfortably borrow.
So, follow the logic. Are we really to believe that Uruguay’s $136 billion national debt is less of a risk than the $8.4 trillion U.S. national debt just because it is so much smaller?
Let the debt doomsday crowd make their dire predictions about the end of the world, but don’t listen to them. They’re just trying to scare you. Even politicians use it to try to scare you because they know fear is a great motivator. And the next time you see one of those debt clocks, ask to see a GDP clock right along side of it. You’ll see the numbers on that thing tick up as fast or faster than the debt. Then calculate the debt-to-GDP ratio and you’ll see there’s absolutely nothing to worry about. So get on with your activities of investing and making money and let the debt doomsday crowd worry their way to extinction.
Mike Norman is the founder and publisher of the Economic Contrarian Update and a frequent guest on the Business Block.