On Jan. 20, 2009, the national debt stood at $10.627 trillion—or $34,782 for every man, woman and child. As of Tuesday, it had reached $16.435 trillion, or $52,139 for every American. The public debt was equal to 40.8% of gross domestic product on Jan. 20, 2009. By the end of last year, it had reached 72.8% of GDP and is forecast by the nonpartisan Congressional Budget Office to hit 76.1% this year.
Mr. Rove includes a paragraph on the debt situation:
Hmmm. The key phrase is “public debt.” We economists call it the government debt. And, like most issues related to government finance, it’s messy.
Boring Stuff: Details of the Debt
The government debt is made up of two big parts: the federal government debt and total state and local debt. As of January 1, 2012 (effectively the end of calendar year 2011), the federal government debt was $10,810.6 billion. State and local debt totaled $2,985.0 billion. The sum of those two figures is $13,795.6 billion. Both of these figures are from the Federal Reserve database as maintained by the Federal Reserve Bank of St. Louis in their FRED database. Total government debt as stated by the Treasury department is $15,582.1 billion (also downloaded from FRED). My guess is that the Treasury number includes debt owned by banks and other financial institutions, while the Federal Reserve figures are government debt in the hands of the nonfinancial public (including nonfinancial businesses).
GDP numbers are from the Bureau of Economic Analysis. There is a direct link from that page that downloads GDP totals (real and nominal, annual and quarterly) directly as an Excel workbook. If only Treasury would learn from BEA and BLS.
So here’s the result:
|Federal Government Debt as percentage of GDP (Federal Reserve)||71.71%|
|State & Local Government Debt as percentage of GDP (Federal Reserve)||91.51%|
|Federal Government Debt as percentage of GDP (U.S. Treasury Dept.)||103.36%|
Mr. Rove apparently used the first figure. But that number excludes federal debt held by financial institutions. Let’s assume federal debt held by financial institutions is equal to the difference between the Treasury and the Federal Reserve numbers for total government debt:
|Treasury – Fed||$1,786.47|
|Federal Reserve govt. debt plus Debt Held by Banks||$12,597.08|
|Total Federal Debt/GDP||83.56%|
The debt-to-GDP ratio is too high. The U.S. is not Greece or Italy — yet. But if we stay on the current path, at some point an auction of Treasury securities will fail in the sense that there will be no bidders from the private sector. The Fed could bail out Treasury by purchasing the entire new issue. But that is a policy choice that the Fed must make. The really scary part of all this is that nobody knows the debt-to-GDP ratio at which an auction will fail. There will be warnings, however. Watch for rising interest rates on TIPS (Treasury Inflation Protected Securities).
There was a hint of this in early 2011 when rates rose briefly (For a few months, all real interest rates were positive). This was interpreted as a sign that the markets were expecting economic recovery. A much more frightening hypothesis is that the rise in interest rates was caused by investors fleeing Treasury securities because of a perceived increase in risk. All we know is that the equilibrium interest rate rose and the equilibrium price of these bonds fell. As always, this could have been caused by shifts in either demand or supply. Assuming Treasury is reporting the yields on new-issue securities, the supply is completely controlled by the government. Therefore, demand factors as outlined earlier must be the determining factor. We can speculate all we want, but the interest rates will tell the story.
[Update Jan. 19, 2013, 15:45 GMT-8: I corrected several errors in the Excel workbook, added a new worksheet to accompany my new article on the subject, and improved several explanations.]
As always, my data and methods are transparent. You can download the Excel workbook for real interest rates by clicking here. And you can download the workbook for the government debt and GDP by clicking here.