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U.S. National Debt Set to Outpace GDP

The U.S. national debt, currently approaching $15 trillion, continues to make headlines, the most recent one being that national debt will exceed the size of the U.S. economy this year, two years earlier than originally predicted by the Treasury. In other words, total public debt, the total obligations of the U.S. federal government, will exceed the GDP, the total market value of all final goods and services produced in the U.S. this year.

It’s a prospect that sends chills through the halls of Congress, but it’s important to view it in the perspective of history. The gross debt to GDP ratio rose to over 100% before, as the U.S. struggled to fund its efforts during World War II. In fact, much of the history of the U.S. involves the incurring of major national debts in order to pay for the country’s involvement in wars, the first debts coming as a result of the Revolutionary War. The War of 1812 brought on more debt, followed by the Civil War. World War I saw the national debt jump to over $25 billion.

It was the double whammy of the Great Depression, and the social programs it fostered, together with the expenditures required by World War II that pushed national debt beyond GDP, and eventually shot gross public debt up to $260 billion in 1950. In 1933, national debt was only about 20% of GDP, but just three years later it had risen to 40% of GDP, as the economy languished and spending programs increased. Military expenditures for World War II did the rest.

Up to that point, budget surpluses had been the rule between wars. National debt would generally increase during times of war, and decrease during times of peace. But post 1950, with the continuous pressures of the Cold War, and its spin-off wars such as the Korean War and Vietnam, national debt held steady, and then increased dramatically from 1980 onward. The increase in GDP following the beginning of the communist collapse in 1990 significantly reduced the debt to GDP ratio, but that ended with the current recession.

Today, the government is caught in a bind of historic proportions, under political pressure to choose between cutting government spending and taxes, or increasing government spending and taxes.

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