Debt as a percentage of GDP can grow for a limited time, but it can’t do so indefinitely.  Large budget deficits will reduce national saving and lead to more borrowing from abroad and less domestic investment.  This will in turn depress income growth in the United States.  As the ratio of Debt to GDP continues to grow, lenders will become concerned about the financial solvency of the government and will demand higher interest rates to compensate for the increasing risk of holding government debt.  If the budget outlook doesn’t improve, eventually both foreign and domestic lenders will no longer be willing to provide sufficient funds for the government to meet its obligations.  At that point, the government will have four choices - print money, raise taxes, cut spending, or go into default.  Regardless of what action they take, America’s economy will sustain serious damage - think deep, deep Depression.

"Be not made a beggar by banqueting upon borrowing"

- Ecclesiasticus



If we were to immediately raise taxes to pay for this runaway spending instead of letting the deficit and the Debt grow, tax rates would have to reach levels significantly higher than anything we’ve ever seen.  Federal revenue as a percent of GDP reached it’s historic high of 21% in 1944.  Over the 60 years from 1951 through 2010, it averaged 17.8%.  It would need to increase to 24% by 2015 and steadily climb to 26% by 2050 to offset the projected spending increases while controlling the Debt at it’s current level relative to GDP.  That’s a 37% increase in all federal taxes - payroll taxes, personal income taxes, corporate income taxes, etc.  But these high tax rates would slow down the growth of the economy, drive up unemployment, and make the spending burden even harder to bear.  It’s a vicious spiral.


So how do we solve the problem?  Every special interest group has their own favorite brand of Magic Pixie Dust - just sprinkle it on the problem and it will painlessly disappear.  Of course their solutions align with their political agendas.  To take a look at several of these remedies to see what impact they would have on the problem, check out DEBT REDUCTION ROULETTE >> 


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If this graph isn’t scary enough, here’s another way to look at the data.  We’ll use 2007 as a baseline to factor out the current huge spike in stimulus spending.  For every dollar the federal government spent in 2007, it will spend $8.15 in 2050.  That figure has been adjusted to factor out inflation.  By 2080, it will spend $27.12 for every dollar spent in 2007.  Obviously this just isn’t possible.  The bubble will burst long before we reach that point.  But that’s no consolation.  We need to take action now before we dig this hole any deeper.

We're Walking Off The Cliff Again

Whether or not the various extraordinary expenditures - the Toxic Asset Relief Program, Cash for Clunkers, Mortgage Refinancing, the Auto Company Bailout, Federal Subsidies to the State Governments, etc. - employed by the Federal Government to rescue and stimulate the economy during the financial crisis were necessary and/or effective, these expenditures were just the tip of a huge and growing iceberg.  The real problem is spending on the entitlement programs, specifically Medicare, Medicaid, and Social Security, and on the resulting interest payments on the ballooning Debt.  The graph to the right clearly illustrates the problem.  Based on the federal government's projections, federal spending will consume two-thirds of the overall US economy by 2080.  This is 50% greater than at the height of World War II.  If we don't get this under control, the American Dream will turn into a nightmare for our children and our grandchildren.