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Debt

What Drives Long-Term National Debt Growth?

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What Drives Long-Term National Debt Growth?

What Drives Long-Term National Debt Growth?

With the current 106% debt-to-GDP ratio, there’s no doubt that today’s government debt is high. The last time the United States reached this mark, it was during the aftermath of WWII in the late 1940s.

But despite nearly historic debt levels, it does not seem that the national debt is a key issue for most citizens and groups. What drives this accumulation of debt in the long run, and at what point does the debt level become so high that it becomes an undeniable and critical issue for the country?

Today’s infographic comes from the Peter G. Peterson Foundation, a NYC-based group that focuses on educating people about the fiscal challenges of growing government debt. The graphic illustrates the main factors driving the debt upwards, as well as the potential impact down the road.

Rising Temperatures

The trouble with debt is that it delays today’s challenges well into the future, making it a tempting short-term solution when other things aren’t working. However, over time, that burden increases steadily, and the situation quickly represents the “frog and boiling water” parable.

So what’s raising the temperature of that water?

Right now, the aging of the Baby Boomers is a key factor, and the amount of people receiving social security benefits will swell from 62 million to 88 million people by 2035. At the same time, Medicare’s hospital trust fund will run out of money by 2029, and the program will only remain solvent until 2034.

Whether it’s the growing enrollment in these programs or the rapidly escalating costs of healthcare itself, more money will be put towards Social Security and healthcare over the coming years.

By about 2045, government spending on major health programs will nearly double in size to greater than 9% of GDP.

Boiling Water

Today, interest on the debt is equal to about 1.4% of GDP.

However, if the projected pace is maintained, it’s anticipated that interest payments could be equal to 6.2% of GDP by 2047 – this is roughly 2x the average annual amount the federal government spends on education, infrastructure, and R&D combined.

As economists will point out, the government controls the monetary supply and can easily “print” money to make these payments. This is absolutely true, but it also creates an array of other problems such as inflation and increasing distrust in the monetary system.

Though this boiling point looms further down the road, having a plan to cool the temperature (or to jump out of the water) could be a prudent one to keep in our back pockets.

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Chart of the Week

How the Modern Consumer is Different

We all have a stereotypical image of the average consumer – but is it an accurate one? Meet the modern consumer, and what it means for business.

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How the Modern Consumer is Different

How the Modern Consumer is Different

There is a prevailing wisdom that says the stereotypical American consumer can be defined by certain characteristics.

Based on what popular culture tells us, as well as years of experiences and data, we all have an idea of what the average consumer might look for in a house, car, restaurant, or shopping center.

But as circumstances change, so do consumer tastes – and according to a recent report by Deloitte, the modern consumer is becoming increasingly distinct from those of years past. For us to truly understand how these changes will affect the marketplace and our investments, we need to rethink and update our image of the modern consumer.

A Changing Consumer Base

In their analysis, Deloitte leans heavily on big picture demographic and economic factors to help in summarizing the three major ways in which consumers are changing.

Here are three ways the new consumer is different than in years past:

1. Increasingly Diverse
In terms of ethnicity, the Baby Boomers are 75% white, while the Millennial generation is 56% white. This diversity also transfers to other areas as well, such as sexual and gender identities.

Not surprisingly, future generations are expected to be even more heterogeneous – Gen Z, for example, identifies as being 49% non-white.

2. Under Greater Financial Pressure
Today’s consumers are more educated than ever before, but it’s come at a stiff price. In fact, the cost of education has increased by 65% between 2007 and 2017, and this has translated to a record-setting $1.5 trillion in student loans on the books.

Other costs have mounted as well, leaving the bottom 80% of consumers with effectively no increase in discretionary income over the last decade. To make matters worse, if you single out just the bottom 40% of earners, they actually have less discretionary income to spend than they did back in 2007.

3. Delaying Key Life Milestones
Getting married, having children, and buying a house all have one major thing in common: they can be expensive.

The average person under 35 years old has a 34% lower net worth than they would have had in the 1990s, making it harder to tackle typical adult milestones. In fact, the average couple today is marrying eight years later than they did in 1965, while the U.S. birthrate is at its lowest point in three decades. Meanwhile, homeownership for those aged 24-32 has dropped by 9% since 2005.

A New Landscape for Business?

The modern consumer base is more diverse, but also must deal with increased financial pressures and a delayed start in achieving traditional milestones of adulthood. These demographic and economic factors ultimately have a ripple effect down to businesses and investors.

How do these big picture changes impact your business or investments?

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Central Banks

Visualizing the Snowball of Government Debt

See the latest levels of government debt, based on the IMF’s most recent data. Where does your country sit in the snowball?

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Visualizing the Snowball of Government Debt

Over the last five years, markets have pushed concerns about debt under the rug.

While economic growth and record-low interest rates have made it easy to service existing government debt, it’s also created a situation where government debt has grown in to over $63 trillion in absolute terms.

The global economic tide can change fast, and in the event of a recession or rapidly rising interest rates, debt levels could come back into the spotlight very quickly.

The Debt Snowball

Today’s visualization comes to us from HowMuch.net and it rolls the world’s countries into a “snowball” of government debt, colored and arranged by debt-to-GDP ratios. The data itself comes from the IMF’s most recent October 2018 update.

The structure of the visualization is apt, because debt can accumulate in an unsustainable way if governments are not proactive. This situation can create a vicious cycle, where mounting debt can start hampering growth, making the debt ultimately harder to pay off.

Here are the countries with the most debt on the books:

RankCountryDebt-to-GDP Ratio (2017)
#1Japan237.6%
#2Greece181.8%
#3Lebanon146.8%
#4Italy131.8%
#5Portugal125.7%
#6Sudan121.6%
#7Singapore111.1%
#8United States105.2%
#9Belgium103.4%
#10Egypt103.0%

Note: Small economies (GDP under $10 billion) are excluded in this table, such as Cabo Verde and Barbados

Japan and Greece are the most indebted countries in the world, with debt-to-GDP ratios of 237.6% and 181.8% respectively. Meanwhile, the United States sits in the #8 spot with a 105.2% ratio, and recent Treasury estimates putting the national debt at $22 trillion.

Light Snow

On the opposite spectrum, here are the 10 jurisdictions that have incurred less debt relative to the size of their economies:

RankCountryDebt-to-GDP Ratio (2017)
#1Macao (SAR)0.0%
#2Hong Kong (SAR)0.1%
#3Brunei2.8%
#4Afghanistan7.0%
#5Estonia9.0%
#6Botswana14.0%
#7Russia15.5%
#8Saudi Arabia17.2%
#9DRC18.1%
#10Paraguay19.5%

Note: Small economies (GDP under $10 billion) are excluded in this table, such as Timor-Leste and Solomon Islands

Macao and Hong Kong – both special administrative regions (SARs) in China – have virtually zero debt on the books, while the official country with the lowest debt is Brunei (2.8%).

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