When analysts calculate government debt to GDP ratios they almost always make two mistakes when it comes to the US:
- They forget/exclude Government Sponsored Enterprises (GSEs) whose debt is either directly or indirectly backed and/or guaranteed by the federal government. The total debt of GNMA, FNMA, etc is $7.7 trillion, or 33% of GDP.
- They forget/exclude State and local government debt, now at $3.3 trillion, another 14% of GDP
Add all the debt together, and the official, government sector now owes almost $40 trillion, or 174% of GDP - see chart below. Some may say that GSEs aren’t “really” government obligations, but look closely at what happened in 2008-11. That’s when the Federal government bailed out all those GSE mortgage lenders.
Therefore, the US government is now the world’s fifth most indebted, right up there with the likes of Greece, Sudan and Eritrea… but, we continue to whistle past the graveyard.
Very sad to see these numbers. IIRC, I think it was Carmen Reinhart and Kenneth Rogoff's book "This Time is Different: Eight Centuries of Financial Folly" that roughly pegged a debt to GDP ratio of 90% as the event horizon / point of no return for countries they studied. It's because at this level and above, the debt load begins to change the economic dynamics, and not for the better. Before the GFC Australian economist Steve Keen was also saying a similar thing - that as debt loads in a country become higher, it starts having adverse distortions on economic variables. He was one of the few who was pretty much right about the severity of the 2008-2009 debacle, as he included debt loads and debt level-dependent feedback loops in his models. I would love to see the US Congress hold the federal budget constant as current levels (no growth, not even to account for the current bastardized inflation statistics), and let that slowly drive tough decision making on what is important. However, doubt that the political will exists for such an approach.
ReplyDeleteThank you for the Rogoff and Keen references, very interesting.
DeleteI’m afraid you are right, the US has become so dependent on deficit/debt finance that it simply cannot even imagine operating under a different set of rules..
So much for my memory. After doing a little bit of googling, I need to walk back my earlier comment. Reinhart and Rogoff laid out the 90% debt to GDP ratio in a paper entitled "Growth in a Time of Debt" (https://scholar.harvard.edu/files/rogoff/files/growth_in_time_debt_aer.pdf). There were errors with some of their calculations and omissions of data that undermine some if not all of the claims made in the paper (https://www.newyorker.com/news/john-cassidy/the-reinhart-and-rogoff-controversy-a-summing-up). Not sure how I missed the brouhaha over the paper. However, given my biases, I still think the message coming from some quadrants of "It's the debt, stupid" has considerable merit.
DeleteNeither a borrower nor a lender be… Ben Franklin 🙂. Pretty good timeless advice
Deletesounds like a recipe for endless recession. =)
Deletehmm... to also take a slight tangent; I guess the assets (Fed purchased treasuries) should be subtracted from the debt (-9 trillion?)... I know the Fed is theoretically not govt; but since we are counting this way, we can treat the Fed as govt. Makes the picture better, but not spectacularly so....
ReplyDeleteHere’s the fundamental problem: the Fed is not an investor who can say “oh well, no worries, I don’t want to be repaid, I’ll just go ahead and write those bonds off”. The Fed is a (central) BANK which has issued dollars (liabilities) against those very same Treasury bonds (assets).
DeleteIf those bonds are written off, what stands behind the dollars already issued and circulating around the world? Easy answer, they become worthless, too.
See the problem?
I see it more as meaning that if the Fed writes off the debt, it cannot take liquidity out of the system and may thus lose control of the interest rate / inflation. Does it matter?
DeleteI feel the Fed has already lost control. Its not that Powell does not want to raise interest rates, he can't. If he tries to raise interest rates and needs to back down, this whole illusion comes to an end...
I was thinking about it.... I feel that (mechanically speaking), the Fed could safely void half the debt and nothing would happen, since they are unlikely to ever want to sell more than half of their current assets.
Delete