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Kim Butler

Partners for Prosperity, Inc.

City:Mt. Enterprise

State: TX

I have 20+ years of handling alternative investments in cash, growth and income for clients nationwide.  I strive to help my clients with all things financial in every way possible over the phone and the web.  I own an alpaca farm which I enjoy working during my downtime.  I also enjoy gardening, writing and reading books.  I also train other advisors on Prosperity Economics.

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Part 3 – GDP and the National Debt

Third in a series - GDP,the deficit and the National Debt

The growing national debt of the United States has been the subject of countless front pages from the mainstream press and has become fodder for bloggers and web dailies for the past decade.  As we examine the relationship between GDP and the national debt, here is a summary of pertinent recent news headlines from the past few weeks:

·         The U.S. national debt has reached $14.6 trillion this year.

·         In order for the U.S. government to legally fund its obligations, Congress has had to increase the debt ceiling once again in 2011.

·         The total U.S. debt is estimated to surpass the GDP of the country by the end of this year – reaching 102.6% of GDP.

The ratio of debt to GDP has only once in recent history been higher than it is now.  During World War II, the national debt stood at 120% of GDP.  The ratio declined quickly after the end of that war and settled to around 33% during the period from 1974 to 1980.  After 1980, it began to rise again until it reached over 65% in 1994 and 1995.  From 1996 to 2000, the ratio of GDP to national debt dropped to under 60% until it rose again after 9/11 when the wars in Afghanistan and Iraq began.  The ratio remained under 62% until 2007 when the Recession began and has increased significantly since then to over 100% this year.

The relevance of this ratio, and the importance of studying the effects of a high national debt on economic growth as measured by GDP, was studied by University of Maryland’s Carmen Reinhart and Harvard’s Kenneth Rogoff.  In a paper presented to the American Economic Association last year, the two found that when a nation’s debt exceeded 90% of its GDP, economic growth is hampered by 2% when compared to countries whose GDP to debt ratio is near 30%.

After World War II, the U.S. economy grew rapidly, and GDP grew much faster than the national debt. This resulted in lower and lower GDP to national debt ratios.  If history is going to repeat itself, the growth engine of the U.S. economy has to kick into gear in order to have any chance of helping the country pull out of the recession and to help reduce the size of the U.S. national debt.