Last Friday, the U.S. national debt surpassed $16 trillion. Not only is this by far the highest in history, it's also greater than a full year of U.S. economic output. That's right, the U.S. Gross Domestic Product, or GDP, was $15.6 trillion in the second quarter (April-June) 2012. This means the debt-to-GDP ratio is now 102%. Back in 2010, the International Monetary Fund (IMF) predicted this wouldn't happen until 2020. I predicted back it would happen in 2011, so we were both off a little bit.
What This Means to You
First, you will probably hear a lot more about the debt and deficit in the next few months, as both parties use this milestone to tout their debt-cutting strategies. Second, and more important, as Federal borrowing approaches the debt limit, the U.S. will approach a debt limit crisis similar to the summer of 2011. This uncertainty could cause the stock market to take a dip and economic growth to slow.
If borrowing approaches the debt ceiling BEFORE the election, expect it to be all over the news. It will probably have a worse impact than it did last summer. If it happens AFTER the election, well, the response will depend on who gets elected. Coming as close as it does to the fiscal cliff, things could get dicey. Or, the lame duck Congress could easily pass legislation to avoid the fiscal cliff budget cuts, as no one really wants to the economy to slow down AFTER they get elected.
Can you see how this election will be critical to the future of the U.S. economy? Vote, or don't complain if things don't go the way you'd like.
Second, take advantage of record-low interest rates if you are thinking of making a purchase anytime soon. Rates are low now because of uncertainty, and Federal Reserve quantitative easing, both of which keep the benchmark 10-year Treasury yield extremely low. After the election, and if the fiscal cliff is resolved in favor of economic growth, the high debt may cause yields, and interest rates, to rise next year.