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Tune Out the Debt Doomsday Crowd

http://www.fool.com/personal-finance/general/2006/06/16/tune-out-the-debt-doomsday-crowd.aspx

Mike Norman
June 16, 2006

Have you ever seen one of those debt clocks? They show our national debt, with the numbers ticking away at the end so fast you can't even read them.

The debt is a source of popular conversation again, now that it has hit a new high of $8.4 trillion. And of course, it's never been out of favor with the Debt Doomsday crowd. I'm sure you know those folks. They're the ones who have been predicting a debt-driven collapse of the U.S. economy for decades -- yet it's never happened. Even so, you can be sure they won't go away. They're a patient and persistent bunch, so you can be sure they'll keep waiting for it and telling you it's only a matter of time before Doomsday unfolds.

You want my advice?

Ignore them.

Much ado about nothing
I'm going to let you in on a little secret: The U.S. debt is tiny. That's right, tiny. Take a look at this: The $8.4 trillion figure is only about two-thirds of our nation's economic output, which is currently at $13 trillion and growing. This happens to be far below the debt-to-GDP ratio (debt divided by gross domestic product) of most other countries. In fact, the United States ranked 35th on a list of 113 countries in a recent study.

You still think that's high? Well, perhaps you should consider this: America beat out such notable fiscal conservatives as France and Germany. And super-saver Japan, by comparison, weighed in as a super-heavyweight on the debt scales by taking position No. 3: Its bloated debt-to-GDP ratio was 170%, meaning that debt equals 1.7 times the nation's economic output. For those of you wondering who took the dubious top honors in the world of national debt, it was Uruguay, with a debt-to-GDP ratio of 793%!

For America, however, the debt news is really better than it appears. Of the $8.4 trillion that the government owes, $3.5 trillion is intragovernmental debt -- or what the government owes to itself. Essentially, this is all bookkeeping, and operationally never a cause for worry.

The remaining $4.9 trillion, however, is owed to the public. When you look at that as a percentage of GDP, however, it comes in at a very comfortable and manageable 38%, which is well below the post-World War II average of 43%.

Why is the debt-to-GDP ratio so important? Well, think about it in terms of an individual. For someone making $35,000 per year, $10,000 in debts may be a difficult amount to deal with. On the other hand, $10,000 in debt for Bill Gates would be nothing (even if he is leaving Microsoft). Even $10 million in debt would be nothing for him. Furthermore, if you've ever gone to a bank to get a loan or some other form of credit, you know that bankers and finance companies use the debt-to-income ratio all the time to help determine how much someone can comfortably borrow.

So follow the logic. Are we really supposed to believe that Uruguay's $136 billion national debt is less of a risk than the $8.4 trillion U.S. national debt just because it is so much smaller?

Hardly. Uruguay's economic output is $13 billion. The United States' economy is one thousand times larger! America is the Bill Gates of global economies. So as long as our economy keeps growing -- which it has since the inception of our country -- then paying that debt or continuously rolling it over, as we have been doing, is not a problem.

Countries need credit, too
Alexander Hamilton once said that having a national debt is a national treasure, because it's a reflection of a nation's ability to establish and maintain credit. Anyone who's ever been denied credit can understand how difficult life can be with credit troubles: You can't buy a car; you can't buy a home. Perhaps you are even denied work because of a bad credit history.

For countries, credit is equally important. The Debt Doomsday crowd will focus on that nominal $8.4 trillion number and tell you that "America is a debtor nation." What they won't