by Daniel Brouse
Economist, Pi Gamma Mu
January 22, 2020
The U.S. economy is the worst in history. There are several measures for the health of an economy. One of the best is the “debt to GDP” ratio. National debt divided by the nation’s gross domestic product = debt to GDP ratio.
During 2019, the nation’s debt to GDP ratio reached a record high (when the Fed’s balance sheet is included.)
Calculation:
23.177 trillion $ 2019 Debt
3.8 trillion $ assets on the Federal Reserve’s balance sheet
_______________
26.977 trillion
/ divided by the GDP
21.439 trillion
_______________
125.83% debt to GDP ratio
One hundred and twenty-five percent is the highest debt to GDP ratio in the history of the United States of America.
When an individual borrows money, their debt to income ratio usually can not exceed 36%. The debt to income ratio is a reliable indicator of the ability to repay a loan. Exceptions are made for young borrowers with likely prospects of wage growth. The growth rate of the US GDP has been flat and is projected to go lower.
When a nation borrows money, the debt to GDP ratio also determines the ability to repay the debt. Therefore, it is safe to say the U.S. is in the worst economic position ever.
It’s not really a good idea to compare the debt to GDP ratio to other countries or periods in time. A better rule of thumb would be a ratio under 40% and preferably close to 0; however, for those that are curious:
Denmark — 35%
Switzerland — 33%
Australia — 47%
China — 47%
UK — 87%
Mozambique — 119%
The USA historically has had a ratio in the 30% range from 1967 through 1984. The last time the ratio came close to today’s 125% was in 1945 – 1947 when the ratio hit 119% due to the effects of WWII, the recession, and President Truman’s economic policies.
Why the Fed’s Balance Sheet is Important
It is very important to include the assets on the Federal Reserve’s balance sheet in the calculation. The reason being — the Fed should not have any assets on its balance sheet. When the Fed buys assets from the Treasury, the government is in fact borrowing the money from itself. The government is “printing” money. The government is competing with the private sector to lend the government money. Interest rates are artificially low due to the lack of competition. Borrowing more money to repay debt is unsustainable.
The U.S. General Accounting Office (GAO)
The GAO has the best accountants in the world. The GAO says: “The Comptroller General testified before Congress about the government’s unsustainable fiscal outlook, the need for a long-term plan to address growing debt, and other aspects of the nation’s fiscal health.” The comptroller concludes the continued growth of public debt is unsustainable. “This statement is based on our prior work on the High Risk List; the fragmentation, overlap, and duplication annual report; natural disasters and climate change; and other topics.”
Worst Economy Ever
The U.S. economy is currently the worst in the nation’s history. At no time in history has our debt + Fed assets / GDP = 125%. The economy is unsustainable.