Thanks to Dennis for the correction. Here is a revised post:
The current perception is that US is taking on too much debt, an amount that it may not be able to repay. Kenneth Fisher suggested we should not blindly follow the general perception, and we should investigate to find the truth.
Just like personal finance, we determine our debt level by comparing between liabilities and assets that we have. The standard debt to asset ratio is 35%. Likewise for businesses, we look at the debt to asset ratio and benchmark to the industry to determine any over-borrowing. As such, can we extend this evaluation to countries? This is what Kenneth Fisher suggests – look at the ratio between budget deficit and Gross Domestic Product (GDP). [Afternote: it should be more accurate to compare external debt to GDP. External debt is the amount of money owed to other countries. As opposed to budget deficit, it only considers the debt for one year. External debt takes into account the cumulative effect.]
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Surprisingly Hong Kong has a debt at 311% of its GDP. US is standing at 94%. The world’s average is 98%. Is US having too much debt? Maybe not yet. But how fast is US adding to its debt? We can take a look at the budget deficit.
Take a look at the table above. I have extracted the 2009 figures for budget deficit (in USD) and took the percentage to the GDP of various countries. The figures are taken from Wikipedia and you should just take it as a close estimate to the actual figures.
If the growth in GDP is slower than the rise in budget deficit, it would add on to the debt (in % GDP) that US is holding.
Going further, Fisher found that stocks do well after Federal Budget run into deficit.