“If you establish a democracy, you must in due time reap the fruits of a democracy. You will in due season have great impatience of the public burdens, combined in due season with great increase of the public expenditure. You will in due season have wars entered into from passion and not from reason; and you will in due season submit to peace ignominiously sought and ignominiously obtained, which will diminish your authority and perhaps endanger your independence. You will in due season find your property is less valuable, and your freedom less complete.” –Benjamin Disraeli
As we roll our broader coverage and expand our focus on the macro research side of our business in 2010, one area of focus will be sovereign indebtedness, which changes daily. Internally, we have ceded the critical role of following the national debt of the United States to Darius Dale, and you will likely be seeing some notes from him on this topic in the near future. As a precursor to what will become an ongoing discussion for us, I wanted to outline some key facts relating to the burgeoning U.S. national debt:
- Total current U.S. National Debt - ~$12.17 trillion;
- Total current U.S. National Debt per taxpayer - ~$111,622; and
- Debt to GDP ratio – 83.5%.
These numbers are subject to some debate and we have sourced them from usdebtclock.org. Setting aside specific debate on the precise number, the point remains the U.S. National Debt is large and expanding. The key components of this debt are as follows:
- Medicare and Medicaid 21.9%;
- Social Security 19.2%; and
- Defense and Wars 19.1%.
U.S. National debt as a percentage of GDP has been climbing steadily since 2000, and has seen exponential growth in the last two years. At the current ratio of ~83.5% debt to GDP, we are at level not seen since the 1950s. We have outlined this metric in the chart below going back 90 years. By the end of 2010, this number is projected to be near 100% of GDP absent a dramatic shift in domestic budgetary policy. As with any borrowing, the more a person or entity borrows, even the United States of America, the cost of borrowing will go up, all else being equal. This will have an increasing impact on the pricing of U.S. government securities in time.
Interestingly, the national debt of ~$12.17 trillion, actually excludes Fannie Mae and Freddie Mac debt. The U.S. government became the effective conservator of both of these entities with the Housing and Economic Recovery Act of 2008. The estimated combined on and off balance sheet debt of Fannie and Freddie is purported to be just over ~$5 trillion. Including this additional $5 trillion in debt, U.S. Government debt as a percentage of GDP is actually more than ~120%. On that basis, U.S. government debt as a percentage of GDP is the highest ratio it has ever been, or at least since the numbers have been recorded, which is since 1792. Needless to say, both ever, and since 1792, are a long time.
Globally, this data hasn’t been updated since 2008, but based on 2008 data, the U.S. has the fifth highest indebtedness as a percentage of GDP, just barely above Singapore and just below Jamaica, man. The only other countries more indebted than the U.S., on this basis, are the economic stalwarts of Zimbabwe, Japan, and Lebanon.
Keep your eyes on U.S. government debt . . . this Queen Mary is not turning any time soon and will hold investment implications related to many asset classes for years to come. Not to mention, as former British Prime Minister Benjamin Disraeli states above, implications for our very freedom and prosperity.
Daryl G. Jones