Mortgage News - US Battles Soaring Debt-to-GDP Ratio Amidst Crises And Pandemic

US Battles Soaring Debt-to-GDP Ratio Amidst Crises And Pandemic

Mortgage News June 16, 2023

Debt can serve as a valuable tool for addressing immediate challenges, but its repercussions can be severe and enduring, spanning years or even decades.

The history of excessive government debt stretches back to the origins of institutions worldwide. For context, let’s examine a more recent example. In the midst of World War II, while Britain engaged in a fierce struggle against the Axis powers, the monarchy found itself in need of significant funds to support its war endeavors. To fulfill this requirement, Parliament extensively borrowed from Canada and the United States.

According to conventional fiscal theory, a nation’s economy tends to decelerate when its debt-to-GDP ratio surpasses 77%. Britain, however, far exceeded this threshold during and after the war, accumulating a staggering debt of nearly $10 billion by 1945 and reaching an astounding debt-to-GDP ratio of 200%.

When a country’s debt reaches twice its annual output, it becomes highly unfavorable, especially when there is a need for infrastructure reconstruction and restarting industries. Britain’s economy suffered greatly for about ten years following the war due to its substantial debt. The burden of the debt fell on British taxpayers, who paid substantial taxes every year to service the wartime debt. Remarkably, it wasn’t until 2006 that Britain made its last payment, highlighting the long-lasting impact of such debt.

While Britain managed to recover from its debt burden, many countries with high debt-to-GDP ratios struggle for extended periods before experiencing a rebound. Argentina provides a case in point, as it experienced a default on its debt exceeding $100 billion in 2001 when its debt-to-GDP ratio climbed to 156%. Greece, Zimbabwe, and Venezuela have also faced significant economic challenges stemming from debt.

The impact of substantial debt extends beyond emerging markets, as demonstrated by Britain during World War II. However, this reality holds true even in present times. In the United States, our robust and continuously growing economy has historically mitigated the significant impact of taking on tens of billions of dollars in debt.

In 2005, despite ongoing war efforts, the United States maintained a steady national debt-to-GDP ratio of 60%. However, the 2006 financial crisis forced the country to accumulate trillions of dollars in debt to stimulate the economy, resulting in a debt-to-GDP ratio of 106%. The COVID-19 pandemic has further impacted the U.S. economy, leading to a higher debt-to-GDP ratio. During the peak of the pandemic in Q2 2020, our ratio reached around 134% before settling at a relatively moderate (yet still significant) 120%.

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US Battles Soaring Debt-to-GDP Ratio Amidst Crises And Pandemic

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