U.S. stock markets declined this morning by 2%, mainly based on concerns that the failure of the congressional “Super Committee” to reach a solution will cause future economic problems. While the lack of an agreement is hardly a surprise, the decreased likelihood of an agreement adds to the overall economic uncertainty.
So, after three months of most market analyses focusing on Europe, attention has returned to the U.S. Much of the political debate is concerned with the size of the budget deficit and the amount of debt in the U.S. economy. As is the case with any debate, economic data are “politicized,” with various commentators inflating numbers or taking them out of context. One unfortunate consequence of such hyperbole is that it affects the perception of the financial markets, and often causes unnecessary panic among investors.
Below is a table of various key countries level of sovereign debt as a proportion of Gross Domestic Product (GDP). The countries were chosen as either those which have been in the news lately or as bellwether economies.
Sources: The Central Intelligence Agency; Standard and Poor’s
The table shows that the level of U.S. debt is actually far lower than most other leading world economies. Countries with significantly higher debt levels are rated AAA and considered to be healthy.
There is no doubt that a lower level of national debt, all other things being equal, leads to a lower perception of risk and lower interest rates. And it would be highly beneficial to have political agreement on a solution to limit the deficit. But it’s important to keep things in perspective. Our economy seems to be in a slow recovery, and the level of the debt, by itself, is certainly not a cause for alarm.