41% of American GDP is in Debt. Will it be 82% after 10 years?

If you weren’t asleep at the wheel recently, you saw a big move up in mortgage rates from 5.03 to 5.3% range a few days ago. Today we received the US GDP report for the first quarter: negative 5.7%. Our GDP contracted again but not as bad as predicted—a minus 6.1% was predicted. But the difference is really meaningless. Some good news though is the Michigan Sentiment index which improved nicely this month. At least we feel better, even though we mistakenly believe things are on the mend.

The price of oil is up over the last several months as the US dollar index falls to its lowest level in months—in fact, pretty much of a free fall. Oil and the dollar tend to run inversely now. Gold is up $50 dollars since we last looked at it: at about $975 an ounce. The price of Treasuries is falling and the rates are up significantly. The Fed has been buying bonds to keep mortgage rates down and stable for future homebuyers. The ten year bond has to adjust to the market trends. This strategy will and is failing. Our debt is too high.

We have some 11.3 trillion dollars in debt. For 2008, it is 41% of our GDP. In ten years, it is expected to rise to over 82%. According to John Taylor of the Financial Times, we could see that at 100% of GDP. To avoid that he says we need a 60% income tax increase to pay off the debt. Of course, that won’t happen. To stay at the current levels, we would see inflation at 10% per annum for the next decade. Uncle Sam will allow inflation to devalue our dollar and savings to answer his debt problem. Taylor says we could see the 70’s again with great increases in inflation and boom and recession cycles. If you lived then, you remember gasoline shortages and a rip-roaring inflation with rates up to the high teens to twenties. Five year bonds paid 14% and thirty year treasuries even higher.

In addition to the above, our federal tax revenue collections were down by a third. With the recession and millions unemployed, it is hardly surprising. But add to this the fact that baby boomers are going to hit retirement and collect their Social Security checks and join Medicare, things can continue to sour. Blue is the color and it is not our skies.

What to do? Art Laffer and co authors suggest in The End of Prosperity, that we should raise the age for Medicare and Social Security to 70-71. This would remove that problem totally. Then, we must get this massive spending program under control. This debt is going to kill us. But what politician has the courage to do so. We will just hear more yelling and hair pulling about it and nothing will be done. Oh, I know, let’s tax the rich.