Wednesday, February 3, 2010

Burn The Debt Clock

It's a perpetual and ever-growing sign of government waste. There's a well-known symbol devoted to counting every single dollar devoted to it. It causes outrage from voters and politicians alike every time it grabs the headlines. And there seems to be no end in sight to bringing it down, regardless of who's in charge.

It's the national debt. The number, according to the CIA World Factbook, now stands at $13.45 trillion, an amount so large as to be an abstract number, beyond the range of an average person's comprehension. It's massive, it's growing, and it produces outrage every time the debt ceiling is raised.

But is it the best way to gauge America's financial situation? No.

The national debt merely measures one side of America's financial ledger- its external debt- and doesn't take into the amount America itself is owed- its national credits. Nor does it measure how big a bite it takes out of the country's books.

Now, let's be clear before we go any further: we're measuring external debt here, not public debt, which the National Debt Clock measures. The Debt Clock shows $12.36 trillion currently, but much of the Debt Clock's number, around three-quarters of it, is taken from internal debts, money that we effectively owe to ourselves. If you wish to measure this number, the most effective way to do it is to look at public debt as percentage of gross domestic product, not the raw dollar amount of debt. In this regard, the CIA Factbook shows the United States sitting at 39.70%, in 66th position out of 129 nations measured, almost exactly in the middle. Almost nobody outside the CIA would place the percentage that low for the U.S., but the larger point is that not a single one of the 129 nations is shown as being debt-free. The IMF rates the U.S. much higher, at 65.363%, and other sources will place the U.S. even higher than that, but again, that misses the larger point that no country will be found on the plus side in this measurement.

The ten worst-performing countries in terms of public debt, according to the CIA: Zimbabwe, Japan, St. Kitts and Nevis, Lebanon, Jamaica, Singapore, Italy, Greece, Sudan, Iceland. Ten countries that are all over the place in terms of overall fiscal health. This is a bad way of measuring ourselves too. Forget the Debt Clock.

Very few countries on Earth are debt-free externally either. According to the CIA, only four places can make that claim: Brunei, Liechtenstein, Macau, and Palau, and one of those, Macau, isn't widely recognized as a sovereign nation. The top of the external debt scoreboard is an indiscriminate Who's Who of the First World, less a measure of a nation's fiscal responsibility than one of a nation's ability to do business. After the United States, the rest of the top ten reads: United Kingdom, Germany, France, Netherlands, Spain, Ireland, Japan, Luxembourg, Switzerland. They all have over a trillion dollars US in external debt. Australia has an estimated $920 billion in debt Canada has an estimated $833 billion in debt. Norway is an estimated $548 billion in debt. China is an estimated $347 billion in debt. Saudi Arabia is an estimated $72 billion in debt. Venezuela is estimated at $43 billion in debt. Tiny Niue is in the fifth-best debt situation on Earth, 194st out of 198, and they show an estimated $418,000 in debt. The four that are not in debt merely show as breaking even.

This doesn't work. Everybody has debt, but obviously countries have to come out ahead. Economics don't work if everybody loses. Nobody would engage in trade if that were the case. Even in a Ponzi scheme, there's still one person that comes out ahead in the end. All that money is going somewhere. So how do you find where exactly?

Enter the account balance: credits minus debts. You don't balance your checkbook only by figuring out how much money you pay out. You get paid too. It's measured the same way as the national debt; however, the account balance tallies up the money you are owed by countries in debt to you, as well as the money you owe. (An even better gauge of where we stand would be account balance as a percentage of GDP, where the US's -4.330% pales in comparison to many other nations, such as Bulgaria's -21.853%, Nicaragua's -24.840%, or Liberia's -42.141%, but since hard dollar figures are what is needed, it's not as useful.)

Unfortunately, the United States doesn't do well in account balance either. In fact, America looks even worse. We at least have some company in national debt, with the United Kingdom carrying over $9 trillion in debt of its own, but as far as account balance goes, we're in a class by ourselves. According to the IMF's World Economic Outlook for April 2009, the United States is $673.266 billion in the red, worlds behind second-to-last Spain, who is merely $154.036 billion US in the red.

On the other end of the spectrum, unsurprisingly, China comes out ahead of the pack, $440.011 billion US in the black.

The ten countries furthest in the black (in US dollars):
China, 440.011 billion
Germany, 235.257 billion
Japan, 157.079 billion
Saudi Arabia, 139.041 billion
Russia, 102.331 billion
Norway, 83.802 billion
Kuwait, 70.594 billion
Switzerland, 44.847 billion
Sweden, 40.429 billion
Libya, 39.217 billion

The ten countries furthest in the red (in US dollars):
United States, -673.266 billion
Spain, -154.036 billion
Italy, -73.200 billion
Greece, -51.482 billion
United Kingdom, -45.392 billion
France, -45.327 billion
Australia, -42.833 billion
Turkey, 41.416 billion
India, -33.330 billion
Portugal, -29.437 billion

However, as bad as that may look, there is a silver lining. The US may be languishing far behind everyone else financially, but the actual amount we are in the red is only a fraction of what the national debt claims. The $673.266 billion in account balance is only 5% of what the national debt of $13.45 trillion shows. That means it's that much easier to pay off.

And furthermore, while the last time we were debt-free was in 1835, we were a creditor nation not very long ago at all. According to the IMF, the US was in the black as recently as 1991, when our account balance showed a surplus of $2.895 billion. So it is possible.

We don't need to become debt-free. Almost nobody is. We just need to have more money coming in than we have going out. And we've done it recently enough that some members of Congress who were in office at the time are still around.

Now can we do it again?

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