by Bill Baker, J.D.
Editor and Publisher, The San Bruno Beacon

February 1, 2010 -- Wall Street Journal -- White House Proposes $3.38 Trillion Budget.

The most important part of the Wall Street Journal story mentioned in the previous sentence is:

"......the president's budget would add $8.5 trillion to the federal debt through 2020, pushing the debt as a percentage of GDP to 77% from 53%.

The Wall Street Journal figure of 77% is probably not a correct figure. The Heritage Foundation points out that the Congressional Budget Office estimates the Obama Budget will increase U.S. National debt as a percentage of GDP to 81.7%.

Why is this U.S. public debt as a percentage of gross domestic product (GDP), [debt-to-GDP] calculation, so important and what does it mean?

The U.S. debt-to-GDP calculation is a measurement of the ability of the United States to make future payments on the debt and interest on debt that it owes. Therefore, the debt-to-GDP number is a measurement of financial leverage. The higher the debt-to-GDP percentage, the higher the risk that the United States will default on its national debt and the interest owed on that debt. As the debt-to-GDP number grows, the United States must pay a higher rate of interest to issue new debt to cover the higher risk reflected in the higher debt-to-GDP number.  

Here's something everybody needs to know: there is a dynamic in the debt-to-GDP number that results in a point of no return where it becomes impossible to stop a U.S. economic collapse. Higher public debt means higher interest rates. As interest rates increase, it becomes harder for both companies and individuals to borrow money. The inability of companies and individuals to borrow money results in a slower economy and lower GDP number. As the GDP number declines, the debt-to-GDP ratio increases unless there is a reduction in the debt number which becomes impossible as the amount of interest to be paid on existing debt becomes greater and there is no money available to pay the underlying debt.

Therefore, by the time the U.S. Public Debt is at the projected 80+% of today's GDP, interest rates will be significantly higher than they are today. U.S. productivity will have decreased based on the higher interest rates and the GDP number will be smaller. A smaller GDP number will mean that even if the U.S. does not borrow a single penny more than the projected borrowing, the lower GDP number could turn the 80% debt-to-GDP ratio into 85%, 95%, 100%, 110% or higher. As the debt-to-GDP ratio increases, things spiral out of control as interest rates continue to increase, productivity continues to decrease and eventually, creditors stop lending money to the United States.

As the debt-to-GDP ratio increases to the point where nobody will lend the United States any money, the U.S. Dollar (a fiat currency) goes through a cycle of devaluation to the point of becoming worthless.

In economic terms, the United States may have already reached the point of no return with respect to economic collapse because, at this point, the U.S. is so deeply buried in debt that the drastic measures necessary to stop the U.S. Public Debt from increasing are probably not politically sustainable. As pointed out in an interesting blog written by Larry Walker in Detroit:

"...............the Federal Government can pay off the National Debt in 30 years by making interest and principal payments of $699,013,323,930.52 per year.........."

Larry even published a national debt amortization schedule showing what it would take to pay down the U.S. Public Debt to 0 in 30 years.

To pay down the U.S. Public Debt to zero in 30 years; taxes would skyrocket, government programs would have to be slashed to the bare bones and the United States would have to undergo a painful and dramatic social and economic transformation. These events would result in extreme political and social instability.

The bottom line is that things do not look good.

Here are the choices for the U.S. Government:

1). dramatically increase taxes, cut government programs to the bone and pay off the U.S. Public Debt in 30 years or less.

2). continue borrowing more money and paying more interest until the U.S. Dollar becomes worthless and our creditors cut us off.

3). change the terms and conditions of the U.S. Public Debt by unilaterally lowering  or eliminating the principal amount of the debt owed and reducing or eliminating the interest paid on all U.S. Public Debt. This move would force all creditors to the negotiating table and could  eliminate or dramatically reduce the amount of debt and interest owed on the U.S. Public Debt. Even though this would cause a meltdown in the equity and bond markets it would give us a fresh start.

two longshot approaches to the problem include (but are not limited to):

4). try to find an energy source that  the United States can control, that would allow the United States to control the market for that energy source and set the pricing terms for that energy source.  For example, this could be achieved by the long shot discovery of an oil field larger than all of the oil fields that have been previously discovered. This could also be achieved by a breakthrough scientific discovery that breaks the U.S. dependence on foreign oil.

5). find a way to dramatically increase the GDP number to significantly lower the debt-to-GDP ratio and keep interest rates low. 

The problem with the current political situation at the Federal level is that the Democrats control the Administration and Congress. The Democrats do not have the answer to solving the U.S. Public Debt problem. Neither do the Republicans nor any other single political party. The solution to the U.S. Public Debt problem is a blended solution that includes a wide range of simultaneous fixes and programs to minimize the pain while achieving the goal of resolving this serious problem that will eventually result in the economic collapse of the United States if it is not resolved.