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TheStreet Open House

It's Not the Debt Level, It's the Economy (Stupid)

NEW YORK ( TheStreet) -- All credible projections of federal spending show entitlements, especially Social Security and Medicare/Medicaid, exploding in coming years -- unless, that is, Congress and the President do something to fix the situation.

In 1982, projections were that Social Security faced insolvency by 1990. But that didn't happen because President Reagan and House Speaker Tip O'Neill reached a compromise and a solution that kept the Social Security program viable for a while longer.

Today, due to demographic and other factors, the growth rate of Social Security, Medicare/Medicaid and the other entitlements has budget-busting and debt-level implications that have caused consternation and uncertainty in the business community and financial markets.

When Congress and President Obama will be forced to confront the spending issues, their choices will be: raising taxes, reducing benefits or, via compromise, some combination of the two. But we know they won't act until the spending issues become a recognizable crisis and their political futures require action.

This is most likely to come in the form of "invisible hand" economic actions wherein the dollar drops in value relative to other currencies and interest rates rise as the international community relies less and less on the dollar as the world's reserve currency. If that doesn't cause enough political pressure to bring about the necessary spending controls, then the U.S. economy may well lose its premier status.

The Reality of the Debt

One argument in the current bickering is the country will never be able to repay the $17 trillion of debt it has accumulated. From an economic point of view, the debt level itself isn't the issue. The issue is how fast that debt is growing and its cost.

Unlike an individual whose debts all come due upon death (either the estate pays the debt off, or the lender(s) writes it off), a country doesn't die. As long as the growth rate of the debt is less than the growth rate of the economy, and as long as interest rates remain reasonable, the debt will never have to be repaid. From this point of view, the most significant single statistic with regard to the debt is its relationship to GDP.

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