2016 Presedential Campaign Issues: United States Federal Government Spending And Debt
This post on US debt is the first installment of several posts on Presidential Campaign Issues that deal with finance or money. Many of the topics we will discuss are mentioned briefly by the Presidential candidates or the news media. However, the discussions are rarely complete and often have a slight bias to them. We will try to provide relevant facts without too much commentary.
Debt is an extremely useful tool for individuals, corporations, and governments. It allows individuals to purchase assets, such as houses and cars, over their economic life. Imagine having to accumulate $200,000 to $300,000 to purchase a house. It is hard enough for most people to accumulate the down payment of 20 percent necessary to avoid mortgage insurance.
Corporations use debt to fund capital projects with a lower cost of capital than equity. The result of corporate debt (also know as financial leverage) is that return, as well as losses, are magnified. However, too much leverage in the corporate world can result in disaster. The housing crisis was largely created from excess leverage via derivative securities. Warren Buffett said “Derivatives are financial weapons of mass destruction.” While that can be true, derivatives also have very useful purposes, such as minimizing risk. It is not the derivative, but the use of it that can create havoc. Similarly, debt is very useful, but can also destroy.
Governments use debt to pay for projects and other needs. For example, the construction of toll roads and stadiums are often financed using municipal bonds. This purpose makes sense. Use proceeds from a bond to fund the construction of an asset that will be used for twenty to thirty years. However, governments, like corporations or individuals, can be over leveraged.
How much debt is too much debt for the United States?
The United States federal debt (see US Debt Clock) currently exceeds $18 trillion ($18,000,000,000,000) and exceeds US GDP. The debt to GDP ratio exceeding 100 percent has only occurred one other time in the last 100 years. We will not attempt to answer the question of how much debt is reasonable for the United States. Rather, we present the facts, or at least some of the facts that may help you further your Money Education. The charts below are based on information primarily from the Federal Reserve Bank of St. Louis and Budget files from the White House Website.
As the 2016 race for the White House heats up, there will be significantly more discussion on the debt and the Federal Budget. Hopefully, the information below will provide some insight and or context to what you hear from the various candidates.
