Editor's Note: This blog was written by Dick Anderson, Minnesota School of Business-Shakopee, Business Program Chair, as part of his ongoing blog series. Today Dick takes on the topic of national debt.
So, the hot news this past week is "which President has spent the most money during their term." Honestly, I could care less, since that is like trying to see who ate the most at Thanksgiving at my house over the last 110 such occurrences (remember, I am 110). Apart from the obvious, me, how would you measure this, since each meal typically presented a varying menu in addition to the turkey?
What is relevant when it comes to spending, deficits and debt for our Government? As financial investors, we know that debt is one of the first things we look at when analyzing a company. What we know is Debt, in itself, is not a bad thing and is vital to almost every company in some way or other. Some debts are short term and interest free, such as credit from suppliers, while other debts are longer term and do incur interest. In most cases it is the interest bearing debts that are the danger, although in some cases a sudden reduction of incoming cash can cause a cash flow crisis where suppliers cannot be paid for.
So for me, what is good for the hen is good for the tom (turkey talk since I love Thanksgiving). We need to be concerned about debt as it relates to worth or equity. The closest thing to worth when looking at the Federal Government’s statistics is GDP (Gross Domestic Product). So what we ought to do is look at debt and I mean “unfunded debt – all liabilities owed by the Government” compared to GDP.
Today, the amount of unfunded liabilities owed by the United States government is a mind-numbing $115.49 trillion, bringing the total debt level to $131 trillion. The GDP in 2011 was $15.1 trillion (DOC statistics). Thus our debt to worth ratio in 2011 equals 8.7 percent. As an investor, anything over 5 percent would be a terrible investment and indicates that the company cannot sustain this level of debt. In 2008, the unfounded liabilities were $54 trillion with a GDP of $14.4 trillion. This gave us a debt to worth ratio of 3.75 percent. Not a bad investment at that time. As a company, we would be in serious trouble.
I have heard that many politicians and even the FRS suggest we need to allow inflation or a devaluing of our currency (a result of inflation). Contrary to modern economic assumptions, devaluing a currency has proved through history to be the undoing of many an empire or nation. For instance, the collapse of the Roman Empire can be traced through their monetary inflation and onerous tax burdens used to sustain the "panem et circenses" (bread and circuses) public warfare/welfare programs that keeps the inhabitants of Rome content enough to not revolt.
So let it be said, I love my turkey. But even I recognize when I have to cut back and diet. This doesn’t mean that I should support a tax on those rich turkey growers to reduce the amount of turkey that I could buy in order to save me. It means, I just close my mouth and push away from the table. Bon Appetit!