Wednesday, February 3, 2010


Putting the Federal Debt in Perspective

[UPDATE below.]

If the Congress doesn't act (the Senate has already done it and we're just waiting on the House), the federal government will hit its debt limit by the end of February. The current limit is some walking-around money, specifically $12.4 trillion.

Now a lot of people say that's no big deal, because the US economy is so big. They throw around figures of the debt-to-GDP ratio being something like 60 percent. So two things:

(1) Just check the math. The federal debt will be $12.4 trillion in a few weeks, and 2009 GDP was $14.3 trillion. So that means a debt-to-GDP ratio of 87%. I think what's going on here is that the Federal Government & Friends own a lot of the outstanding Treasurys, so that the lower ~55% figure refers to the net debt (held by the public). For example, the Federal Reserve owns a lot of Treasury debt, and I think the way the books are cook-- setup, the Social Security "trust fund" consists of a pile of IOUs issued by the Treasury.

(2) More important, why is the denominator the US economy? That implies that the federal government owns the whole economy, so that every penny earned in principle is income to the feds who could use it to service their debt. But that's not what a household does. I don't say, "Honey sure our credit debt is high in absolute numbers, but compared to the neighborhood's total output this year, it's nothing." If we instead compare the US government's debt to its "income" (i.e. tax revenue) in FY 2009, then we see the debt-to-"income" ratio is more like ($12.4 trillion / $2.1 trillion) = 590% of income.

Obama has compared the government to a household in these tough times. So how many of you could get fresh loans right now, if you were carrying a[n unsecured] debt load 5.9 times higher than your annual income?

UPDATE: The anal von Pepe points out that plenty of households have debt-to-income ratios higher than 5.9. I should have clarified, I meant unsecured debt. It's not as if new creditors can repo the USS Kennedy if the Treasury defaults on its bonds. (Despite my sarcasm, I am acknowledging that von Pepe is right; my original post was unclear.)

The government doesn't own the whole economy? It sure acts like it does. I watched a video that explained the "borrowing" from social security and it talked about the real national debt. I don't really remember it, but if someone dug it's probably eye opening. It's okay though, I'm sure I could go to the bank to get a loan if I had that ratio....
plenty of households have debt-to-income ratios higher than 5.9

What?!?!?!? Who has a debt to income ratio this high?

My goodness, I feel silly now for worrying about the 2x annual income left on my mortgage.
Plenty of household may have a debt-to-income ratio higher than 5.9, but does that mean that's intelligent or sustainable?
I think I can agree with all the statements and it depends on a person's risk tolerance and future prospects amongst many factors.

Now, I am not defending the government, but the keynesians are saying that they can borrow at 0-4%so the actual interest is reasonable (Income/interest expense). This is correct up to a point. They are funding longer term obligations with short term money...sound familiar? This was a major casue of the I-bank blowups and the governemnt is in big trouble if interest rates go up.

For those of you doing Debt/income calculations I would ask you to do a Income/interest calculation at your current rate and then cut the interest rate to 2-3% and you will see you are quite ok for now, and ok in the longer term if your debt is not floating.
If government finance is just like household finance, does that mean BHO has repudiated the Keynesian Multiplier and all the other Keynesian nonsense?
Actually now that I have left the office and have thought about it calmly with my defenses down, I totally see what von Pepe is saying.

Basically this: It is unfair for us to point to a typical household's "safe" debt (whether secured or not) - to - income ratio, to test whether feds are being profligate, because they can borrow easily at half the interest rates we can.

So at best, I should have said, "If you had an unsecured debt-to-income ratio of 3, would lenders give you more right now?"

The answer is still no, of course, but von Pepe is right that I was comparing apples to oranges.

Also, one could argue that I should have used not the gross debt figure of $12.4 trillion, but the smaller net debt figure.

I'm not sure if that's right, and I'm too tired to think it through right now. I.e. if we're not counting Social Security liabilities (which we're not in this type of analysis; this is explicit contractual government debt in the form of bonds) I'm not sure we should count the holdings of the SS trust fund as assets, either.
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