How Dangerous is America’s Debt? [Time.com]

Link to original article, June 6, 2012, Time.com

In the past three weeks, the Congressional Budget Office (CBO) has released two reports that seem to justify contradictory fiscal policies. The first calculated that the U.S. economy could be thrown into recession because of existing legislation to reduce the deficit sharply next year (the so-called fiscal cliff). The second projected that the U.S. will face an eventual financial crisis if the deficit is not reduced sharply.

… If you compare the debt of national governments to their countries’ annual gross domestic product (GDP), the European Union averages 83% and Canada around 85%. Call that normal. Individual European countries that are in the worst financial shape have debt levels that are a lot higher — see Italy’s 120%. Call that bad.

… Here’s what this all adds up to: U.S. government borrowing by itself does not become dangerous for more than 10 years.

… Entitlements are another question. A recent study by USA Today calculated that if Social Security, Medicare and all other entitlements are counted, then U.S. debt is growing at four times the rate reported by the government. By that standard, we are already bankrupt. In addition, the indebtedness of state and local governments, as well as the debt carried by banks and other private-sector financial institutions, shouldn’t be ignored. Both areas are potentially fragile.

… Entitlements, particularly health care, are the big risks. The government simply won’t be able to pay for all the things it has promised.

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