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Wednesday, March 21, 2012

Does the National Debt Matter? -- the New Blockbuster Movie

Does the National Debt Matter? (a micro drama about a macro problem)


Okay, so maybe "blockbuster" was a bit of an overstatement.  Maybe it was just a slow day in the markets, and I wanted to try out the really fun xtranormal website.   And maybe, just maybe, the video will reach those folks who find reading to be tedious.  We can hope...


Last night, at my 9-year old's father-daughter dance, a friend mentioned that his investment manager ("really, really smart people") insist that the spiraling national debt doesn't matter.   We've been down this road before, and it won't matter this time either.  Having spent 20 years in institutional investment management, I know all about his investment manager.  I know that, like most managers, they're better at marketing than managing money.  My friend, who really, really is smart, will figure this out soon enough.

But, it got me to thinking -- have we really been down this road before?  They point to the fact that debt soared during the Great Depression (40% of GDP) and World War II (95%), but those dollars were recirculated in the real economy -- building dams, roads, planes and tanks -- not gifted to banks to pad their balance sheets. 

Today, we sit at about 115% of GDP.  We spent about $3.6 trillion in 2011, while taking in only $2.3 trillion.  That $1.3 trillion difference is paid for with more debt -- now $15.5 trillion.  Because interest rates are so low, we spent only $227 billion net in servicing the debt.   You can pull that kind of thing off with a 10-year at 2%.

If rates return to the 2000's 6%, however, the annual interest burden would rival our annual expenses for Social Security, Medicare or Defense.  At 1980's rates, it would eclipse Social Security and Defense combined.  These figures, by the way, assume we miraculously and immediately balance the budget -- which would require a 66% increase in taxes or a 40% drop in expenditures.  Don't hold your breath.

Bernanke and friends are doing the only thing they know how to do -- they're keeping their patient alive with an adrenaline drip.  Congress and the White House are slipping him pizza and smokes when no one's watching.  And, the American public...we're so engrossed in daytime TV in the hospital lounge that we can't hear the heart monitor blaring.

Does the national debt matter?  Not at all.  Until it does.