Weekly Market Insights

Federal Debt as Percent of GDP

Monday, February 22, 2010

The Obama administration’s recently released budget for fiscal year 2011 forecasts some fairly hefty deficit and debt totals in the coming years. Publicly held debt as a percent of gross domestic product is projected to increase from 53.0 percent in 2009 to 63.6 percent this year and 72.9 percent in 2015. As retiring baby boomers drive up the cost of Social Security and Medicare, the ratio is projected to rise to 77 percent by 2020. There is not a specific threshold above which the debt ratio becomes a threat to the stability of the financial system and the economy, but economists generally seem to prefer ratios below 60 percent and are made nervous by ratios above 80 percent. Uncomfortably high levels of debt could undermine faith in the dollar, causing investors to shun U.S. Treasuries. This, in turn, could cause interest rates to spike as the Treasury would be forced to offer higher rates to attract investors willing to finance its debt, with higher inflation as a result. Debt levels rise during recessions as tax collections fall and outlays such as unemployment insurance increase. This is how it’s supposed to work as federal expenditures help stabilize the economy, although reasonable minds can disagree on the size of those expenditures. But the long-term rise in the debt-to-GDP ratio even after the economy recovers could pose danger to the financial system and will likely require increased taxes, reduced entitlement spending or a combination of both to return the ratio to a lower, more sustainable level. For commercial real estate, a financial environment featuring low interest rates and low to moderate inflation would offer the best climate for growth and rising property values.

 Source: Office of Management and Budget, Grubb & Ellis 

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