Wednesday, January 12, 2011

More on the Federal Debt

In response to my post on the Federal Debt Spike, reader Todd commented:

Would like to see this in real terms or as a percent of gdp. I bet the exponential increase would be even more pronounced.

Makes the Clinton years even more remarkable, the first 7 1/2 Bush years relatively quaint, and the recent response even more dramatic.

Source: Treasury Direct / BEA


  1. I was working at the Fed in the very late 1990s. I was astounded when I learned that there was a great deal of discussion going on in the highest levels about what the Fed would do when the US publicly held debt disappeared. I was astounded because it had only been a year or 2 of surpluses compared with over 20 years of previously large deficits. I told my boss I thought it was a waste of time to worry about it at this point. As your graph illustrates I am sure they are not worried about that problem any longer.

  2. that would actually be an interesting problem to have, but not likely any time soon.

  3. Jake, I wonder if you could show something similar with respects to the private sector balance. E.g. Corporate profits, household/foreign balance, etc.

    For every deficit there is a surplus somewhere else - that's not an opinion, just an accounting identity.


  4. for even more "on the street" bang, i'd plot this as a function of percent employed (non-public the gov't really doesn't produce anything).

    it would show the debt burden per person with a job.

  5. SidK:

    Assets = Liability + Equity

    If liabilities increase, it does not mean assets need to increase as well. It could also mean equity is reduced.

    The question is what have we seen as a result of this increase in debt?

    My broad initial thought is that equity has been transferred from the public sector to the private sector; to be more specific to the wealthy. As states and local government cut back as revenues are lower, wealthy individuals have seen the value of their assets spike from the hand-off.

  6. Hi Jake,

    Yes, I agree with respect to wealth transfer that has resulted from the increase (particularly the recent spike due to bank bailouts) in liabilities.

    However, while you rightly point to the unfairness of the debt burden, it is deficits & surpluses that are better in helping to explain sustainability.

    I know you are focussing on the total debt burden but the federal deficit is what is most alarming because it is the gap we cannot close with your "assets - equity" analogy.

    Also, in an economy, what is one agent's deficit is another's surplus (in most text books it would be foreign, households, corporates and government agents). The interplay between these agent's surpluses and deficits is very interesting. As government deficits have ballooned, cash on corporate balance sheets have exploded.

    I find blogs (other than credit writedowns) and MSM don't look at deficits in this angle. Would be interesting to see your take.


  7. interesting points.

    some of it is now dripping out of the united states (negative savings -->, which explains part of china's cash pile ( other areas it is going is the private sector:

    to the consumer:
    example 1:
    example 2:

    to corporations:

  8. Umm, sort of. I don't want to belabour the point, so I'll just leave this post with a few observations on deficits.

    Historically, foreigners have traditionally shouldered the burden of US deficits (mostly government but also household and corporate - this is commonly referred to as the current account). The near mirror image of this support are the currency reserves in China and elsewhere you point to.

    This "negative equity" is sustainable so long as our current financial architecture holds the US dollar at its core - the world is forced to consume the dollars the US feeds it.

    However, what makes the recent spike in the federal deficit and debt interesting is that it was actually the financial and corporate sector that sucked them up like a giant hoover.

    I would contend it is through this channel that deficits and unemployment are intertwined - a deployment of private sector surplus would mean a reduction in unemployment and a reduction in the federal deficit - ceteris paribus.

    I just wish people would focus on that rather than banging on about federal debt ad infinitum.


  9. sid- first of all, thanks for all the details / feedback.

    question though: what do you think are some things that could drive the deployment of the private sector surplus on the corporate of consumer front / how would that expenditure feed into the long term growth of the u.s. / global economy?

  10. Hi Jake,

    Debt is invariably a politically charged topic because different politically constituencies benefit from it versus those who have to pay for it (e.g. banksters vs. taxpayers). Debate about how to manage debt loads should really focus on the interplay between those economic actors. Typically, in a democracy, government debt will always grow so long as government deficits are able to be financed - and shrink when they can't.

    So having said that, who is financing the deficit and what are different economic agents up to in the US?:

    Financials: the surplus here can be viewed as the extra equity required to facilitate financial debt deflation. In aggregate, the US financial sector is insolvent and will always run a surplus until enough writedowns have been made. Policymakers could do more to facilitate this process - HAMP is designed to frustrate the homeowner but give time to the mortgage lender. Interest on reserves at the Fed incentivize banks to hoard. Sadly, it would seem the banksters are firmly in control of this dynamic for their own ends.

    Corporates: The reason why there is a surplus here is because of excess spare capacity - there is no reason to invest your cash hoard when your factory is going idle. The recent depreciation allowance change may help here, however some claim this would result in a pop in capital spending (like a stimulus), the dynamic here should really be about writing off spare capacity.

    Households: Household balance sheets can't run in deficit for long, hence the predictability of consumer credit. The dynamic here depends mostly on the overanalysed housing market, so let's move on.

    Foreign: This is where things get interesting in the medium term. If we make the jump here that China constitutes the entire US foreign sector imbalance, then the sustainability of plugging the deficit depends on your view on China's economic stability. China's currency reserve is derided as a bad thing for the US. It's actually really quite agnostic for the US, but very harmful to China for it represents an inability to find uses for surplus (like imports or consumption). China's currency reserve as % GDP is at similar levels to that of the US in the 1930's and Japan in the '80s.

    OK, so to answer your question :-). Financials and corporates are on a deflationary mend. Unemployment won't improve until surpluses stop being used for writedowns and spare capacity but there is a LOT of room to goose this process by the government.

    The elephant in the room is the foreign sector imbalance. China has run huge reserves for so long that we have become used to it. But keep an eye on inflation, I see that as the 'outlet' for a broken system. Much like 2008 in the West, inflation may run to a crescendo in the East in 2011/2012 at which point the export goods-for-dollars model breaks down.

    We tend to view government debt and deficits as some nefarious political plot, but actually federal deficits are quite passive creatures held to the mercy of other economic actors. If China halted in its role as the traditional deficit financier, the US govt's hand could be forced to wind down the deficit and therefore the growth in debt, in turn perhaps quickening the deployment of private sector surpluses.

  11. Here's a decent Credit Writedowns post that explains the sectoral balance view of an economy:

    Note: I know I present a thoroughly simplified view of the US economy (the regulatory capture by big banks/biz change things a lot, for example) and I perhaps overplay the role of China.

    But, it would be good if someone broke down graphically the deficit / surplus interplay between different sectors of the US economy.

  12. OK, found it :-)...

    Now, if someone could breakdown that private sector balance....