Tuesday, February 10, 2009

How much can we really borrow?

I was listening to a podcast on NPR's Planet Money. They were discussing the debt to GDP ratio. Currently, the US is at 41%; however, after this additional round of government capital infusion into the economy, this ratio could shoot up to 90%. That is within the debt stratosphere of countries like Greece and Italy. There are a lot of things about Greece and Italy that I wish America would incorporate; however, having the same debt ratio is not one of them.

What does this mean to the US? It will become more costly for us to borrow from countries and other investors. It is true that we had higher levels in the past. In fact, after the World War II, the US was at a debt to GDP ratio between 120% and 140%; however, most of the borrowed money came from within the US, not outside. The concern is that the more we borrow, the more we are dependent on other countries and foreign investors loaning us the money. For America's economy and general security, this is not be a good situation.

During the same day I heard this podcast, I attended a Green Jobs Forum. My Congressman was talking about all of this investment in the green economy. He stated that the money for this investment would come from foreign investors because everyone wants to invest in the US government because it is the safest place for investment. This might change as we continue to spend and borrow, which will push the country's debt closure to 100% of its GDP. As result, we will become a more risky investment and, therefore, we will have to make government securities more attractive for investment by offering a higher rate of return, which will cost America more money to borrow money. This is similar to a bank charging a higher interest rate to a person that has a lot of debt. The US government will have to make tough choices on where to spend this borrowed money as this spigot of cash slows down to a drip and its "water" bill increases. In addition, the US government will need to reevaluate if it should be so dependent of foreign investors.

Unfortunately, as the US government becomes more fiscally prudent and more conscious of who is investing in this country, the victim here may be the investment in green technology because it would not be viewed as an immediate need for the country. This would be a mistake. We cannot lose our focus on the future rate of return for investing in green technology now. The key is that we need to be smart about our investment and spending in this area. Investing in green technology will not only benefit are economic future but also the future of our environment. Unlike my current investments, that would be a very good rate of return.

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