Deficits, Debt, and International Investments

Last week it was official. The U.S. government ran a $1.42 trillion deficit for fiscal year 2009, the worst year since 1945. The fiscal year ends on September 30. While not surprising, the enormous numbers are still hard to believe. The FY 2008 deficit was $442 billion – nearly $1 trillion less.

While the US government, under both Bush and Obama Administrations, spent unprecedented amounts to “stabilize” the economy, such spending only accounted for 24% of the deficit. The real problem was a drop in tax revenue. Corporate tax receipts plunged a staggering 55% and personal income tax revenue dropped 20%.

Despite efforts to stem entitlement spending, the costs of those programs are still going up, adding more pressure to the federal income statement. The White House Office of Management and Budget projects 10-year deficits will total $9 trillion. These numbers can change dramatically, of course, based on economic conditions, war spending, and the prospects for health care reform.

So what does all this have to do with the investor? As you know, budget deficits lead to government debts. Much like the citizens who elected them, politicians have grown accustomed to spending more than they make. However, long-term debts degrade the productivity of an economy. As more taxes are used to pay the interest and debt, less is spent on infrastructure, healthcare, or business development.

If you believe that runaway debt is a bad thing for an economy, you should consider investing outside the United States. After all, the US economy is the biggest debtor nation on the planet. These days, it’s as easy to buy China as it is to buy the S&P 500. Here’s a 2008 list of countries with their total debt (public and private). I’m not recommending any country in particular, but here are some facts to consider.

Rank	Country	External Debt (in millions)	Date of Info
1	United States	$13,773,000	6/30/2009
2	United Kingdom	$12,670,000	6/24/2009
3	Germany	$4,489,000	6/30/2007
4	France	$4,396,000	6/30/2007
5	Netherlands	$2,277,000	6/30/2007
6	Ireland	$1,841,000	6/30/2007
7	Japan	$1,492,000	6/30/2007
8	Switzerland	$1,340,000	6/30/2007
9	Belgium	$1,313,000	6/30/2007
10	Spain	$2,478,000	9/30/2008
11	Italy	$1,060,000	2008(est.)
12	Australia	$826,400	12/31/2007
13	Canada	$758,600	6/30/2007
14	Austria	$752,500	6/30/2007
15	Sweden	$598,200	6/30/2006
16	Hong Kong	$588,000	2007
17	Denmark	$492,600	6/30/2007
18	Norway	$469,100	6/30/2007
19	Portugal	$461,200	12/31/2007
20	China	$363,000	12/31/2007
21	Russia	$356,500	12/31/2007
22	Finland	$271,200	6/30/2007
23	Turkey	$247,100	12/31/2007
24	Brazil	$229,400	12/31/2007
25	South Korea	$220,100	12/31/2007

(Data Courtesy of The World Factbook & Wikipedia)