The Vicious Cycle of Debt

By Tom Kando

On Feb. 13, President Obama presented his 2013 budget plan to Congress, calling for $3.8 billion in expenditures. The plan projects an increase in the federal debt of $1.3 trillion in 2012, and another increase of nearly $1 trillion in 2013.

In 2011, the total fed debt was nearly $15 trillion, or just about 100% of US GDP (which is also about $15 trillion). Currently, 7% of the federal budget (about $250 billion) is spent to finance the debt.


America is in a bleak situation. But (or: in addition), consider this:

1. Our government’s debt-to-GDP ratio is only a bit above the world’s average, which is around 80%, and it is way below that of Japan, where it is 220%. Apparently, there IS life after debt.

On the other hand, the Japanese people own a much greater proportion of their government’s debt than do the Americans. We are much more indebted to foreign entities (E.g China).

And this brings me to my next central point:

2. Everyone has been clamoring about the federal debt for ever, especially the Republicans, who see this as an opportunity to dismantle the government.

But practically no one talks about the other deficit - the trade deficit: if you rank the world’s 192 countries by the size of their balances of trade, the US is dead last.
About 60 countries have a positive trade balance, and the rest are in the red. The largest positive balance is enjoyed by China (almost $300 billion annually), followed by Germany ($150 billion) and Japan ($130 billion). Tiny Holland is also doing very well, in 8th position (almost $50 billion).

And the US? We are the bottom of the list, at number #192, selling each year $600 billion less to other countries than we buy from them. In other words, each year, the American people are sinking deeper into debt to the tune of $600 billion. The second worst trade balance is Turkey’s, at #191, and then Italy’s at #190. But this is not an issue that interests anybody - not the politicians, not the public.

Isn’t the economic catastrophe which awaits America if it doesn’t change course, largely rooted in its inability to practice at least some measure of “Mercantilism”? (I.e. produce and sell things of value, and thus earn as much as it spends?)

The vicious cycle of indebtedness is the same whether it is the government, the American people, or a household which charges too much on its credit card: You fall further and further behind. You are unable to pay back the principal, and as you borrow more, your finance charges rise. Each year, you burn up more of your money just paying interest, and you have less money to buy things.

Already, 7% of the federal budget, a quarter of a trillion dollars, is wasted on paying interest. Even if the size of the deficit were to decline, as long as the government continues to borrow additionally, it will spend an ever larger part of its budget on finance charges, having less and less left for social security, medicare, the military and everything else. This is a death trap.

There is only one solution: taxes must be raised, quickly and significantly. The American economy will not grow out of its problem. And let’s stop the asinine debate whether or not the rich are contributing their fair share. They are NOT.

Furthermore, America must stop spending more than it earns. Of the two deficits - the federal deficit and the trade deficit - the latter is the scarier one.

Only 12 years ago, when Clinton was President, the federal government enjoyed a surplus! I can’t rehash all the causes of the current mess, but clearly the George W. Bush administration started us on this disastrous trajectory.leave comment here