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As the newly-elected chairman of the conservative Republican Study Committee, Rep. Jim Jordan of Urbana has become one of the most vocal budget cutters in the U.S. House of Representatives. Just before he introduced Spending Reduction Act legislation to cut the federal budget by $2.5 trillion over ten years, Jordan delivered a speech to the conservative Heritage Foundation that focused on fiscal discipline. Our debt to GDP ratios, our deficit to GDP ratios are quickly approaching the countries we have been reading about for the last year and a half, he warned. We are not far behind Ireland, Greece, Portugal and Spain and all these countries we have been reading about. Everyone knows the United States government is in debt, but is the situation really as bleak as it is for countries that teeter on the brink of insolvency? Politifact Ohio decided to take a look. The Central Intelligence Agency has compiled a table that compares the ratio of public debt to the gross national product of more than 130 countries, including all those cited by Jordan. According to the CIA, in 2010, Zimbabwe had the world’s highest public debt as a percentage of its annual gross domestic product: a whopping 241.6 percent. Japan was next at 196.4 percent. Greece was fourth on the list, at 144 percent, Ireland was 11th, at 98.5 percent, Portugal was 15th, at 83.2 percent, and Spain was 27th at 63.4 percent. The United States clocked in at 37th, with a debt to GDP ratio of 58.9 percent, slightly higher than the world average of 58.3 percent. Countries including Canada, France and Germany – which aren’t generally listed among the globe’s festering fiscal fiascos – all have debt to GDP ratios that exceed the United States’. Federal bean counters at the White House’s Office of Management and Budget and at the Congressional Budget Office predict the nation’s public debt to GDP ratio will climb to about 77 percent in the next 10 years, which exceed’s Spain’s current ratio and approaches Portugal’s. With such a large increase in debt, plus an expected increase in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket over the next decade, the CBO said in a recent report on the federal deficit. Is that level of debt likely to cause problems along the lines of those experienced by Greece, Ireland and other countries deemed fiscally unsound? Economists are divided on that question, although a study released last year suggests problems are most likely to arise after public debt reaches around 90 percent of gross domestic product. University of Texas economist James K. Galbraith notes that many countries with higher debt to GDP ratios than the United States, like Japan, Italy and Belgium, aren’t in a financial crisis. He says Jordan’s numbers are correct, but the comparisons he makes are meaningless and therefore misleading. He says Japan and the United States are insulated from the default issues that plague other countries because they control the currencies in which they issue debt. Greece, Spain, Ireland and Portugal all have their debt in euros, so they need euro balances on hand to pay their debts. Greece has to draw on a euro account at a bank in order to make payments, Galbraith explained in an email. If the euros are not in the account, Greek government checks could bounce. In this respect, Greece is much more like, say, the state of Illinois; the European Central Bank is not obliged to honor its checks. On the other hand, he said the United States government makes all payments by marking up numbers in a computer -- the electronic equivalent of printing money. It doesn't get the dollars from anywhere -- it just sends a signal to the bank. He says U.S. Treasury Department checks can’t bounce, so there’s no default danger. As should be obvious, the markets know this, and so made the U.S. into a major beneficiary of the crisis of Greece et al., Galbraith said. As Mediterranean eurozone bond yields rose, U.S. treasury yields fell. Why? Because investors sold Greece (and the others) and bought U.S. The markets thus recognize what Mr. Jordan does not: the U.S. public debt position is large and invulnerable, and actually opposite to that of the small, vulnerable eurozone nations. Boston University’s Laurence J. Kotlikoff is among those who predict dire consequences if the nation doesn’t get its fiscal house in order. He envisions massive benefit cuts for retired baby boomers, astronomical tax increases that leave the young with little incentive to work and save, and the government simply printing vast quantities of money to cover its bills. Poverty and inflation are other problems he foresees. You print a lot of money, prices go up and people get hurt because money they had before you did this goes down in value in terms of what it can buy, Kotlikoff said in a TV interview. So what to make of Jordan’s statement? While the United States hasn’t yet reached the debt-to-GDP levels of the countries he cited, it’s on on its way there. But it’s not clear that attaining those debt levels would cause the catastrophic economic damage he implies. Other countries with high debt-to-GDP ratios haven’t imploded, but specifically citing nations like Ireland and Greece implies that disaster is near for the United States economy. In reality, the United States, with its ability to control its own monetary supply, has lots more going for it than Ireland or Greece. Those are important details needed to put Jordan’s statement in proper context. On the Truth-O-Meter, we rate Jordan’s claim as Half True.
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