The National Debt is $13.6 trillion today. Interest expense for fiscal 2010 totaled $414 billion. Based upon the current spending path and assuming that the Bush tax cuts are extended, the National Debt will exceed $20 trillion by 2015. A reasonable expectation of 5% interest rates would result in annual interest expense of $1 trillion. The entire budgeted outlays of the US government are $3.5 trillion today.
Deficits exceeding $1 trillion per year are baked into the cake for the next decade. Non-Defense discretionary spending totals only $700 billion. Defense spending totals $900 billion. The remaining $1.9 trillion is on automatic pilot for Social Security, Medicare, Medicaid, and other entitlement programs. Politicians declaring they will freeze discretionary spending are treating you like fools. It will solve nothing.
Debt as a percentage of GDP will exceed 125% of GDP by 2015. Rogoff & Reinhart in their book This Time is Different point out the dangers once debt surpasses 90% of GDP: The relationship between government debt and real GDP growth is weak for debt/GDP ratios below 90% of GDP. Above the threshold of 90%, median growth rates fall by 1%, and average growth falls considerably more. The chances of bad things happening to a country increase dramatically after the 90% level is surpassed.
Japan began their 20 years of tears with a debt to GDP ratio of 52% and a National Savings rate of 15%. The Japanese people bought 90% of the debt that the government issued. Today, the debt to GDP ratio is 200% and the National Savings rate is 2%. The US entered this crisis with a debt to GDP ratio of 80% and a National Savings rate of 1%. We depend on foreigners to buy more than 50% of our new debt. We do not control our own destiny.
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