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The Federal Debt

A picture is worth a thousand words.  There have been thousands of words spoken about America’s debt of late, but very few pictures presented.  So I thought you might be interested in some graphs.

But first some basic definitions:

  • Federal Deficit:  Annual Federal spending in excess of receipts for that particular year.
  • Federal Debt:  The cumulative total of Federal Deficits to a particular date.  The debt can only go down if the Federal Government “earns” a surplus and applies that surplus to paying down the debt.[1]
  • Federal Obligations:  The Federal Debt accounts for only a small part of expenditures for which the government has obligated itself.  These other obligations are called “unfunded obligations” and are not included in published debt figures.  This situation will be explored in a separate essay.
  • Federal Interest:  The government borrows money to compensate for its annual deficits, and must pay interest on the borrowed money.  The interest represents a significant portion of the Federal deficit and is included in the annual budget but generally excluded from the debt.
  • Debt Service:  The amount that must be paid annually to cover the interest on the debt plus some amount to repay the principal.  Think of mortgage and credit card payments.  If one only pays the interest, the debt will remain forever.
  • Gross Domestic Product (GDP): GDP is the market value of all final goods and services produced within a country in a given period.  Thus GDP is measures the grand national “income” for purposes of this essay.  The higher the GDP, the more jobs and the more wealth; the opposite is also generally true. [2]

This essay examines the Federal Debt only.

Figure 1

Many words have been said blaming our current financial crisis on previous Presidents, by implication absolving the current President of fault.  Is that so?  Fig. 1 depicts GDP (blue) and Federal debt (red) by four-year administration terms, starting with the end of the Gerald Ford’s Presidency.[3]

Note that the GDP has climbed fairly uniformly during this 40 year interval, then took a significant downturn during the Obama administration.  Note also the slight but consistent increase in GDP growth rate starting with the Clinton administration and ending with the second Bush administration.

Further note that the debt has been climbing reasonably consistently for the past 40 years, with a dramatic upturn during the Obama administration.  We see a slowdown in debt growth during the Clinton Presidency, when Congressional fiscal conservatives were able to incorporate some spending cuts into the budget.  We also see a concurrent uptick in the GDP during Clinton’s second term, concurrent with this slowdown in debt growth.  Based on these data points, one can reasonably postulate that GDP growth is at least loosely coupled to overall debt level:  The more debt, the less growth.

Figure 2

Fig. 2 examines this relationship between debt and growth in more detail.  The blue line charts GDP growth (total change) during each four year interval; the red line provides a comparable chart of the debt (total deficit added) during the same four year interval.  The inverse relationship between the deficit and GDP is even more evident in this chart:

  • Consider the period of significant debt growth (deficit) during the Reagan and Bush Sr. years, with comparably slow GDP growth.
  • Then note how the debt growth (deficit) markedly declined during the Clinton administrations, and GDP growth accelerated.
  • The pattern is reversed under the second Bush administrations with debt increasing markedly and GDP growth slowing accordingly.
  • Note further that GDP growth actually increased from Bush’s first to second terms, as the debt increase slowed.
  • This effect is reversed and exaggerated in the Obama administration with debt jumping up dramatically and GDP growth slowing dramatically.

 The pattern is consistent:  More deficit, less growth.  Less growth, less wealth and fewer jobs.  The Obama administration results of Fig. 2 unequivocally demonstrate it.  Is the current crisis and malaise purely the fault of past presidents, with no complicity by the current President?  Not at all.

Figure 3

Fig. 3 depicts debt as % of GDP.  As expected, the shape of the debt curve is virtually identical to the shape of the debt curve in Fig. 1.

Figure 4

Fig. 4 depicts per capita U.S. debt, the total debt of Fig. 1 divided by the total U.S. population.  Note that the per capita debt is comparable in magnitude to the median annual income in the U.S.

Therefore every single infant born in the U.S. inherits this much debt upon birth!  Is this how we plan for our children’s future?  By shackling them with a debt they cannot repay?

Projections

Every slide includes a projection out to 2016 based on the assumption that current policies continue unchanged.  An exponential trend line best fits the debt curve, and is used to predict 2016 debt values.  This is frightening, because we are clearly on the portion of the exponential curve where it explodes and quickly rises to unmanageable levels, resulting in bankruptcy.[4]  A polynomial trend line best fits the GDP curve; it is used to predict 2016 GDP levels.

Inflation

One would expect that everyone in the U.S. would be living like a king because GDP, or total wealth, has increased approximately nine-fold since the end of the Ford administration.  But people are not living like kings.  The purchasing power of the dollar has actually dropped from $1 at the end of Ford administration to about 25¢ today due to inflation.  So, while the GDP grows, two factors erode any gains made:  Population increase spreads the wealth over a larger number of people, and inflation robs us of our purchasing power.  These effects are outside the scope of this essay, but are touched on in Money.

Conclusion

It took only a few minutes to locate a wealth of statistics on the national debt.
It took a few more minutes to select one source which provided the basic information for this essay.
It did not require an advanced degree in economics to analyze and interpret the information.
Preparing the charts took a few minutes longer because I was learning a new version of software.
Writing the commentary and pulling the essay together required a bit longer.

So why is it that our mainstream news media with all their resources and staff do not present the complete story?
Why do they just mindlessly repeat current unemployment figures, debt numbers, or GDP growth rates without analysis and context?
Don’t they know where to locate the source data?
Don’t they have the expertise, time, and resources to go through the few simple steps required to prepare this essay?
Hard to believe…

Perhaps all is not as it looks

(858)


[2] This income is distributed to generate capital to start businesses, create savings, pay for jobs, make capital improvements to the country, and for general consumption.

[3] All figures are in billions to make the numbers manageable.  $1 trillion = $1,000 billion = $1,000,000 million.

[4] At this rate the U.S. will be entering GDP to debt ratio comparable to what Greece is experiencing today.  We can forestall the inevitable day of accounting by continuing to print more money.  For this reason many economists ignore the very real paradigm shift America is facing today because they assume that current conditions will continue indefinitely.  See  http://blogs.wsj.com/economics/2011/06/14/u-s-vs-greece-is-debt-situation-even-comparable/   Unfortunately that is not the case.  We may already have experienced the beginning of a paradigm shift with the Obama administration (See Fig. 2 GDP growth discontinuity.)

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