This is a technical analysis blog, but a topic came up in my office that I thought I should share. Skip this blog if you have no interest in basic economics. This will be the only blog of the week, as I am on vacation.
A long timed client, Bob, recently came into our office. Many of my clients are astute individuals, and Bob’s one of them. Our talk got into the high debts that the US / CDN governments have & are accumulating. I thought it might be fun to give you all of the digits involved with these numbers for the USA.
- The total debt in the US stands around $67,700,000,000,000 –a big chunk of which was accumulated over the past number of years after it evoked various monetary policies. These policies, such as the quantitative easing, easy money and neartermed spending were enacted to stimulate the economy as it came out of the 2008 crisis.
- The current US deficit sits well over $5,500,000,000,000. All of this data came from this source, which I strongly encourage you to view: http://www.usdebtclock.org/
Of course, that debt might be justified by the fact that the act of digging this financial hole has in fact stimulated the US economy out of recession. In fact, the US GDP is growing at just over 2% – nothing to be too excited by, but a positive growth nonetheless – especially considering the crisis in 2008-9. Unemployment sits at a reasonable 4.4% as of the last report in July. So things are progressing. But are they and will they ever move fast enough to pay down the debt?
The criticism is that if growth does not accelerate from here, debt continues to grow. And therefore, the USA will struggle to ever pay it back. The website link I’ve provide above shows how the hole keeps getting bigger. Like a runaway credit card balance–the interest gets added to the debt and piles up exponentially. The requirement for growth becomes greater over time just to keep up – if you in fact can keep up. Like a person with too much debt -eventually, your credit rating is in peril, and your creditors put their foot down – aka Greece, Italy, etc. As David Wilcox sang in his song “Bad Apple”–“I’ve got a lesson for you. And it goes like this: The longer you wait, the worse its gonna taste”.
Bob (my client) noted that Canada had not been facing this same situation that the US faces — until fairly recently, that is. In fact, we had a balanced budget just 3 years ago. Here’s a link to the Canadian debt clock: http://debt.ca/debt-clock.
As I noted in this blog – the Canadian deficit is growing, thus leading into a greater debt. Like the USA, Canada will be facing the never-ending debt spiral if we do not curtail the spending. Read Alexandre Laurin Research Director of CD Howe Institute’s comments on the blog noted above. Greece and Italy might relay the truth of Laurin’s comment: “…we will have to pay for this. How are we going to pay for this? Through tax increases and cuts in spending – spending we have become accustomed to. So it’s going to be painful”
Bob went on to tell me that he conducts informal “surveys” by asking many people he meets if they understand the difference between the National debt and National deficit. Bob feels we should need to write a test proving you understand the basics of these things before we are allowed to vote. He has found that even educated folk are not so informed on these two terms. I share his concerns here. If we don’t understand how these key elements work, we won’t understand how they will affect our future. Thus, we may make bad choices when we elect politicians. We might even elect vacuous, narcissistic politicians who know nothing about the economy (theoretically speaking, of course). So I promised him that I might add to a few peoples knowledge base by defining these terms here.
Deficit vs. debt—in simple terms
The following was copied from http://www.davemanuel.com/investor-dictionary/debt-vs-deficit/
If the government spends more than it takes in over the course of one year, then it has run a deficit. A deficit applies to just one year.
So, if the government takes in $10 trillion dollars but spends $13 trillion dollars in one year, then it has run a $3 trillion dollar deficit.
When the government runs a deficit, then it must borrow money to make up the difference.
A debt is completely different. Think of debt as accumulated deficits.
If the government has to borrow money every year, then its debt will continue to grow year-after-year. This debt does not disappear unless the government elects to try and pay it down (rare occurrence).
The debt usually grows year-after-year. With each additional deficit, the debt continues to grow.
Some people think that if a government takes in more money than it spends in one year, then it suddenly doesn’t have any debt. This is not the case. This simply means that the government has managed to run a surplus (opposite of deficit), but any accumulated debt is still there.
So there you have it. It’s the same lesson we learn when we buy too much stuff on our credit cards. Except some people still don’t get it.