The real GDP (nominal GDP adjusted for inflation) of the United States was $15.79 trillion as of 9/30/13. That is a record high. Our per capita GDP was $49,965 as of 2012. This is the good news. We don't have the highest per capita GDP in the world, but we rank pretty high. Large countries with higher per capita GDP's are Canada and Australia, along with some smaller countries like Luxembourg, Sweden, Norway, Singapore, and a few others.
The not so good news is, government spending is a component of GDP. The most common way to calculate GDP is with this formula: GDP = private consumption + gross investment + government spending + (exports − imports). The reason government spending is the not so good news regarding GDP is because the government has been incurring record amounts of debt in recent years (artificially inflating GDP), as the following chart illustrates:
Our federal debt exceeded the size of GDP in 2012, the only time that has happened outside the anomaly of WWII. We have incurred nearly $7 trillion in debt since Barack Obama became President five years ago, and the total federal debt stands at $17.2 trillion+. If we weren't artifically inflating GDP through deficit spending, our GDP would not be at a record high. Therefore, the "record" part of "record GDP" is part mirage.
Some people say we shouldn't wory about the debt, even though it is outpacing the size of our economy. They say the debt is part of the reason we didn't fall into an even deeper recession, and that view is probably correct over the short term. Another reason we didn't fall even deeper into recession is because the Federal Reserve has engaged in several rounds of quantitative easing (QE), which consists of the Fed buying up Treasury Bonds to keep interest rates low. QE also worked over the short term. Interest rates are low.
It's vitally important to keep interest rates low now, because we have to pay interest on that mountain of debt the government has incurred and is continuing to incur. In FY2013, we paid $222.75 billion in interest on the debt, and that is with interest rates at historic lows. According to Pew Research, the average interest rate on the public debt was 2.43% in FY2013 (I thought it was even lower than that). This begs the question - what happens if interest rates rise ? It isn't reasonable to expect interest rates to remain at a historic low forever. The Fed can only control so much for so long, and if interest rates rise back to where they were in, say, 2000, at 6.6%, suddenly our interest payments would rise to the $600 billion and rising range (rising as the debt rises), consuming an alarming amount of federal revenue. Think of all the government programs that could be funded with $600 bilion or more in revenue available to the Treasury every year. Instead, all that money would go to no real productive purpose. What a waste. This illustrates one of the problems with our current short-term economic thinking. It can and will lead to long-term disaster. If we continue on our current path of debt escalation, it is entirely realistic to expect interest payments on the debt to reach a trillion dollars per year within a decade. How will we then fund essential government programs without remaining on the same insane debt trajectory we are on now ? It would be almost impossible, unless we instituted confiscatory levels of taxation on the American people, which would do great collective damage.
What's even worse is, the above will probably happen at the same time as our already unfunded massive entitlement liabilities begin to explode in size as the baby boomers retire en masse. Social Security and Medicare are underfunded to the tune of more than $60 trillion. That means our current revenue streams for those programs fall that far short in the future. Is there anyone is his/her right mind who believes we can simply keep printing fiat money to pay for all these unfunded commitments ? Unfortunately, there are many such people out there, and they should all be required to change their names to Charles Ponzi immediately, so we can identify and avoid them. They are promoting a theory of economic insanity, and in fact are many of the same people responsible for creating the problems I'm describing in this post.
Another eventual consequence of all this crazy money printing (debt) is the devaluation of the dollar, which will lead to inflation. As I mentioned before, we have fiat money, backed by no tangible asset. Therefore, it has only relative worth. All this debt issuance will eventually make our dollars worth relatively less. Inflation is low now, for a variety of reasons, and that leads some people (the short-term thinkers again) to believe there is no problem. They are enjoying their fool's paradise, though I'd hardly call it paradise for most people. I'd more likely describe it as the lull before the coming storm. All the indicators for future economic disaster are there, but any politician with the cojones to face it is instantly demonized and reviled. Many seem to enjoy their denial. These are the people I describe as the 'spend like drunken sailors now and then hope for a miracle' crowd. That's not much of a philosophy but it seems to be the dominant philosophy in Washington D.C., especially within one...particular...political...party. Thus, our prospects for avoiding future disaster do not look good at all.
In summary, here's what I see for our economic future if our insane fiscal policies do not change - Prices will be higher. Wages will be lower. Economic growth will be smaller. Jobs will be fewer. Taxes will be higher. SS and Medicare benefits will be smaller.
What I can't figure out is why anybody would want these things.
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