Several previous posts ( here.and here) have briefly discussed various components of this $52 trillion US debt. This post focuses on the "US federal government debt" component of the $52 trillion, and its connection with "sovereign debt", and budget deficits. It is also the first in a number of posts to begin relating, in some detail, US debt and US borrowing, to US consumption (GDP), US GDP growth, and US federal government budgets, and to compare those entities with similar entities in other parts of the world.
Figure 1 starts the ball rolling by breaking down the $52 trillion debt into its components, and their recent history, as reported by the Federal Flow of Funds report published March 2010.
So... Let's jump right in.
US "Sovereign Debt", "Government Debt"...
The term "Sovereign Debt" has been much in the press lately. Greece is likely to default on its "sovereign debt" we are told. We are further informed that Goldman Sachs helped Greece to hide parts of their government debt so that they would more easily meet the rules of the EU. Japan is reputed to have a sovereign debt equivalent to 200% of GDP. As a matter of comparison, "US Federal government debt" is currently at about 60% of GDP (7.8trillion/14trillion).
So what is "US sovereign debt", and how does it differ from "US government debt"?
"Sovereign debt" in its broadest term is the debt owed, or guaranteed to be paid, by the government of a country. It is not always easily measured -- witness the supposed "deception" of the Greek government aided by Goldman Sachs about the extent of its sovereign debt. Also, those elements of known and recorded debt that should be counted as part of "sovereign debt", is also dependent on the whims of politicians.
"US federal government debt", on the other hand is a clearly defined accounting entity traceable back to clearly reported fundamentals, namely US government expenses and outlays. In the the case of the US, it is clear, and there is no doubt in any one's mind, that the Federal Government debt ($7.8 trillion in Figure 1) as tabulated in the Flow of Funds report and the NIPA system, is part of "US Sovereign debt". What other portion of this $52 trillion debt has the US Federal government explicitly guaranteed? And what other portion of this $52 trillion does the world think the US federal government must honor? And are those elements correctly called "sovereign debt"? All these questions have a variety of hard and soft answers, depending on the political climate..
We (the US taxpayers) have now put Fanny May and Freddie Mac "Government Sponsored Enterprises" (GSE's) into "conservatorship" and thus under the control and responsibility of the Federal Government. They are not "nationalized" they are "in conservatorship"(!).
Both the federal government and the Federal Reserve have made it perfectly clear to foreign governments -- many of whom own a lot of this debt, that the US government stands behind these GSE debts. That debt (see Agency and GSE mortgages in Figure 1) at the end of 2009, stands at $5.4 trillion. Which brings the US government guaranteed debt to (7.8 + 5.4) = $13.2 trillion, or approximately 100% of GDP. Nevertheless, Tim Geithner says that this $5.4 trillion is not part of US "sovereign debt". A "political" statement perhaps? An obvious ploy to reduce the "sovereign debt" of the US?
In addition to Fanny and Freddie, there is another $2.7 trillion owed by a raft of Government Sponsored Enterprises (see GSE liabilities of $2.7 trillion in Figure 1), which presumably foreign and domestic investors have bought in the firm conviction that the US government stands behind them.
Which brings us to the last item -- State and Local Debt. As we see in Figure 1 the state and local debt added up to $2.4 trillion at the end of 2009.
I suspect that no one really believes that the US government is going to allow the State of California for instance, or NY state or any other state of the union to default on a large portion of their debt which they have already incurred. Remember that all of this debt is current debt -- it does not include the debts which will be incurred in the future as we attempt to meet the pension and medical care promises we have made. These "future promises" can all be "unpromised" by legislative action -- which is ocurring as I write this.
Thus, if I am correct in my assumptions that the federal government will stand behind all the GSE debts and almost all of the state and local debts, then the US "sovereign debt" at the end of 2009 is somewhere in the region of (2.7+ 5.4 +7.8 + 2.4 = $18.3 trillion) -- the total of the lowest four segments of figure 1. This number makes the US sovereign debt to GDP ratio approximately 18/14 = 130% of GDP at the end of 2009. Will this ratio increase? Based on the current US policy of bailing out insolvent banks, it probably will. More on this ratio in later postings.
The putative "US guaranteed debt" is shown below as a % of GDP. Included in Figure 2 is the projected federal debt as a % of GDP predicted in the US FY 2011 budget. I have not attempted to estimate the future percentage of the other components of what I have labeled as "US guaranteed debt". Note that just the federal debt alone is beginning to get close to the magic 80% number in 2015. In 2005 federal debt was about half that -- less than 40%. So, if the projections for federal debt are accurate, in the decade between 2005 and 2015, federal debt will have increased in dollars by $3 trillion (7.8-4.7) and, what is more important, federal debt will have doubled as a fraction of GDP.
My reading of the tea leaves says that federal debt will be somewhat higher than $7.8 trillion in 2015, GDP will be somewhat lower, and that the ratio is more likely to be closer to 90% than 80%.
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"Debt held by the Public", "Public Debt", "National Debt", "Gross Debt"...
The value of $7.8 trillion called federal government debt in Figure 1 above is called "US government debt held by the public" by the US Treasury department, and is the value used in balancing the accounts of the US government.
There is another value of $12.8 trillion of "government debt" which includes another $5 trillion of non marketable debt held by the US government itself, which is in no sense a "debt" owed by the US government in the terms of the "debt" concept we are using in this blog, or in Generally Accepted Accounting Principles (GAAP). As a matter of interest, this $12.8 trillion is subject to the "debt ceiling" set by Congress which, as of March 31st 2010, was $14.3 trillion, and this $12.8 trillion is often used by various bloggers and politicians to (incorrectly) illustrate the massive indebtedness of the United States.
The $12.8 trillion number is sometimes called the "national debt", or the "public debt" or the "gross debt" of the United states. The official numbers for these items are at the treasury department site here , The best explanation of the terms are at wikipedia whose chart is shown below.
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US Government Budget Deficit, "Deficit Spending"
For most of the last four decades the US government has spent more than it has collected in taxes. The difference between "outlays" and "receipts" every year is called the budget deficit. The fact that the US government spends more than it collects is often called "deficit spending".
The deficit increases (or decreases if outlays are less than receipts) the federal government debt. The multiple years of "deficit spending" has created the federal government debt, "debt held by the public"). As we saw above, the federal government debt at the end of 2009 is $7.8 trillion.
The FY 2011 budget outlays, receipts and deficit numbers are shown in Figures 3 and 4 in dollars and in %GDP
Figure 3. Federal Government Budget numbers in dollars
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Figure 3 says that the federal government in 2009 spent just over $3 trillion, and collected just under $2 trillion, causing a deficit in 2009 of of about $1.4 trillion. This deficit, added to the outstanding federal debt of $6.4 trillion at the end of 2008, raised the federal debt to $7.8 trillion at the end of 2009. The FY 2011 US federal government budget estimates that the deficit will increase somewhat in 2010, and begin decreasing after that as a % of GDP.
Figure 4 below presents the same data as a % of GDP. Both charts show a rapid increase in federal government spending and deficits in 2008 and 2009 as government fiscal stimulus rises and tax receipts fall.
The deficit increases (or decreases if outlays are less than receipts) the federal government debt. The multiple years of "deficit spending" has created the federal government debt, "debt held by the public"). As we saw above, the federal government debt at the end of 2009 is $7.8 trillion.
The FY 2011 budget outlays, receipts and deficit numbers are shown in Figures 3 and 4 in dollars and in %GDP
Figure 3. Federal Government Budget numbers in dollars
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Figure 3 says that the federal government in 2009 spent just over $3 trillion, and collected just under $2 trillion, causing a deficit in 2009 of of about $1.4 trillion. This deficit, added to the outstanding federal debt of $6.4 trillion at the end of 2008, raised the federal debt to $7.8 trillion at the end of 2009. The FY 2011 US federal government budget estimates that the deficit will increase somewhat in 2010, and begin decreasing after that as a % of GDP.
Figure 4 below presents the same data as a % of GDP. Both charts show a rapid increase in federal government spending and deficits in 2008 and 2009 as government fiscal stimulus rises and tax receipts fall.
The US "budget deficit" is the line item "federal government borrowing" in the flow of funds report, which in turn is also the difference between the federal government debt at hte end of 2009 plus or minus the federal government at the end of 2008.
The data for total "public and private borrowing" in the credit market, and the four putative elements of federal government guaranteed borrowing are shown in Figure 5 below. Note the massive decrease in total borrowing as banks stopped lending in 2008 and 2009, and the increase in federal government borrowing in the same year. The decrease in total borrowing was compensated somewhat by increases in federal government borrowing, and Federal Reserve actions. I will describe the Federal reserve actions in later posts -- as I begin to understand them better myself!
Figure 5. Elements of borrowing and Total borrowing from the Flow of Funds report.----------------
I will close this post with a chart from PIMCOs Bill Gross "Ring of Fire" article in February 2010 -- I highly recommend it
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Note that Gross uses a figure of about 80-85% of GDP for US "Public Sector Debt", and about 11% of GDP for US Current Annual Deficit. The annual deficit percentage is the same as I have shown, however Gross's Public Sector debt source (Reuters reporter) is probably (incorrectly) using the total $12.8 trillion total public sector debt and not the more correct $7.8 trillion -- hence the 80-85% number.
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