Is America the Most Indebted of the Developed Nations?

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With all the talk these days about national debts -- the European debt crisis, America's debt-ceiling debacle -- I've been wondering how the U.S.'s debt stacks up against other developed countries'. Are we as indebted as it feels like we are?

The U.S. ranks seventh on Fortune's list of indebted developed countries, behind Japan, Greece, Italy, Iceland and other European nations. But, like so many things in economics, the answers can change based on how you do the math. If you define national debt differently, the U.S. springs to the top of the list. So it's worth digging in a bit more.

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When economists discuss national debt, they often focus on one ratio: public debt as a percentage of a nation's gross domestic product. This breaks down into just two components.

Calculating Debt

First, the debt held by the public. As you know, countries borrow money from a lot of different places, including banks, individuals, and foreign lenders. Obviously, the government has to pay that money back.

But countries also borrow money from themselves. Called intragovernmental holdings, U.S. examples include the Social Security and Medicare trust funds. The public isn't responsible for the money the government borrows from itself. Thus, when calculating a nation's debt, some economists remove that financing and instead focus on the money that taxpayers must pay back.

The U.S.'s total debt is $14.3 trillion. However, $6 trillion of that consists of money the government lent to itself, leaving a public debt of $8.3 trillion. That's the first component of the equation.

Weighing in the GDP

The second piece is the GDP, which is the dollar value of all the goods and services that a country produces. In other words, it measures the size of an economy. Currently, America's annual GDP is about $14.8 trillion.

So, what's the relationship between the public debt and GDP? "In some sense, [this equation] tells you about the country's capacity to repay its debts," explains Jim Horney, vice president for federal fiscal policy at the Center on Budget and Policy Priorities. "It's a little bit like looking at the debt a family has when they take out a mortgage. The dollar amount matters, but what really matters is how that amount compares to your income. A family with a very low income could find it hard to repay, where another family with the same debt but a higher income would not have trouble."

If you do the math using America's total debt -- $14.3 trillion divided by $14.8 trillion -- you get 97%. In other words, 97% of America's annual earnings are already committed to debts. No lender in their right mind would want to lend money to a person -- or a country -- who already carries that much debt. But if you only look at the debt held by the public -- $8.3 trillion divided by $14.8 trillion -- the equation comes out to 56%. Owing 56% of your income still isn't great, but it's a huge improvement from 97% and something lenders can work with.

Making Comparisons

So how does America stack up to other indebted developed countries? Going back to Fortune's list, America has the highest total debt out of the top 10 nations that are both "developed" and "indebted." (Japan ranks second, followed by Italy and France).

When calculated as a percentage of GDP, America drops down to No. 7 on the list. (Japan jumps up to the No. 1 position, followed by Greece, Italy and Iceland). It's worth noting, however, that Fortune used total debt, not debt held by the public. That makes the ranking helpful, but not ideal.

As for the debt's significance for America's future, Horney sums it up like this: "There's no question that if we start taking sensible steps, we have the capacity to stabilize the debt-to-GDP ratio, which is what we really have to do to start with. The only real road block is people who say they absolutely won't consider increase in real revenues (i.e. increased taxes). We need a balanced approach that both increases revenues and decreases spending. If we can get that balanced approach, like we had in 1990..., there's no doubt we can get there. But if we can't get agreement on that balanced approach, I do worry about where we're headed."

Loren Berlin is a columnist at DailyFinance. She can be reached at loren.berlin@teamaol.com. You can follow her on Twitter @LorenBerlin, and become a fan on Facebook.
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