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Debt Ratio

Debt Ratio
Kerby Andersonnever miss viewpoints

One economic indicator that investors and average Americans consider is a nation’s debt to GDP ratio. In previous commentaries, I documented that once nations have surpassed a 130 percent debt-to-GDP ratio, they eventually defaulted.

I decided to dig a little deeper. I found that since 1800, there have been 51 out of 52 countries with a debt to GDP ratio this high who have defaulted. This was through restructuring, devaluation, high inflation, or outright default. Japan was the one exception in the past, but it is also fair to say that the U.S. is not that historic Japan, and even Japan today isn’t that Japan.

Why am I talking about this now? First, the current debt to GDP radio is 125 percent. But it is worth noting that the ratio was over 130 percent in the second quarter of 2020 during the pandemic. Second, the current U.S. debt is growing faster than our economy.

A third reason is what happens today. The Federal Reserve has announced that it would end quantitative tightening on December 1. It has been reducing its balance sheet. It will now pivot to quantitative easing and will likely begin to buy assets to increase the money supply.

Let’s go back to these historical examples. The odds aren’t good for the U.S. since 98 percent (51 out of 52) of countries defaulted with a debt to GDP radio of 130 percent or more. Now consider the fact that we have just come off the longest government shutdown in American history because some in Congress wanted the government to spend more money on enhanced subsidies to Obamacare.

Welcome to congressional irresponsibility. We are on the edge of a fiscal cliff, and many in Congress want to spend even more. viewpoints new web version

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