The Unsustainable $40 Trillion National Debt

Authored by Jeffrey A. Tucker via The Epoch Times,

The national debt has now passed $40 trillion. It stands at 120 percent of GDP. That should alarm us and probably does but let's just be honest: no one can conceive of such figures. They are just floating zeros and no one has any sense of whether and to what extent this portends economic doom for us. Maybe it does or maybe it doesn't.

You can perhaps conceptualize this better by considering household finance. The extent of the debt burden a household can handle depends on the ratio of financial inflows to outflows in the form of debt service. This is the debt-to-income ratio. Another consideration looks at assets that would need to be liquidated should bankruptcy arrive. That's the debt-to-assets ratio.

The usual financial advice for a household is to keep the debt-to-income ratio in the range of 30 percent. As for debt-to-assets, anything beyond 50 percent is overly vulnerable to shocks that could turn everything south and quickly, leading to tragedy with even small changes in interest rates, stock valuations, business fortunates, or real-estate hiccups.

And yet here we are with a 120 percent ratio of debt to GDP. This is higher than the brief blowout of the Second World War, a time when the nation was stuffed with real savings and U.S. creditworthiness was un