The Rag Reel

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Tuesday, May 25, 2010

#1 Debt--->GDP

When you want to borrow money these days most lenders will look at your income and expenses before making a decision. The higher your precentage of debt to income, the risker you are as a borrower. Similary, the ratio of a nation's debt to its gross domestic product is a very strong financial indicator.

The European Union set its debt limit at 60 percent of GDP, but Greece has already hit 125 percent and economists are predicting an EU average of around 80 percent by 2012. The European Central Bank's chief economist predicts U.K. debt will hit 88 percent of GDP next year, with the U.S rising to 100 percent and Japan at 200 percent.

Some U.S. poloticians have tried to calm our fears by saying the debt-to-GDP ratio was much higher at the end of WWII. They fail to mention that 90 percent of that debt was earmarked for military spending, which dropped dramatically after the war. Back then, federal entitlement programs, interest expenses and discretionary spending amounted to just 10 percent of GDP.

Today, more than half of U.S. debt is tied to a rising tide of entitlements such as Social Security and Medicare. Cutting all the federal government's discretionary spending would save only 15 percent.

To solve this problem, most governments prefer to raise taxes, not spend less. But if more money is siphoned off in taxes and government borrowing less, less is left to invest in opprotunities such as job creation in America.

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