US National Debt Goes Ballistic

[muse]

I was doing some research for one of my company's clients today when I came across this.

CBS Link

National Debt Soars $500B In Under A Month
Nov. 1, 2008(CBS) This story was written by CBS News White House correspondent Mark Knoller

It’s the surge you won’t hear anyone boast about.

Never before in U.S. history has the national debt increased as much and as rapidly as it has over the past month.

Since September 30, the day the national debt hit the $10-trillion mark for the first time, the government has run up over $500 billion in new debt.

That’s more than the federal deficit for the entire 2008 fiscal year, which ended September 30. And it’s the most rapid increase in the national debt ever: over half a trillion dollars in less than a month - 23 days to be exact.

The government’s latest calculation of the national debt stands at $10,530,893,033,778.21 - that’s $10.5-trillion for short. It took less than four months for it to rocket to that level from $9.5 trillion on July 21.

Less than four months! To put it in perspective, consider this: it took the U.S. government over four decades, from 1940 to 1982, to run up its first trillion dollars of debt.

The second and third trillions were racked up much more quickly - each in just four years. And it only took from 1990 to 1992 for the national debt to hit $4 trillion.

On the day President Bush was sworn in, the debt stood at $5.7 trillion. Less than eight years later, the it’s within days of having swelled $5 trillion dollars on his watch - an embarrassing milestone for a president who considers himself a conservative and an advocate of fiscal discipline.

What’s to blame for the most recent surge in the debt? Above all else, it’s the federal government's response to the financial crisis.

“It’s the Supplementary Financing Program being run by Treasury to provide cash for the Federal Reserve,” says Corrine Hirsh, spokeswoman for the White House Office of Management and Budget.

By that, she means the billions of dollars disbursed by the Fed to keep the financial markets at home and abroad from collapsing. It includes the $124 billion used to keep insurance industry giant American International Group from going bust.

And this week, the Treasury Department started to spend the $700 billion dollars in the congressionally authorized bailout program, so the national debt can be expected to soar even more rapidly in the coming months.

But on January 20, it becomes another president’s problem. And unless he slashes federal spending or enacts major tax hikes, the ballooning deficit and debt leave no money for any of the big ticket programs he's promised to deliver.

Instead, the 44th president will have to deal with the problem of how to pay the interest on the expanding debt. If past practice holds, it’s a good bet the government will just borrow the money.

I've been sorta keeping track of things so I knew it wasn't good, but frankly I didn't expect anything like this. This is a horror show. A trillion dollars sucked into thin air just like that, and it's accelerating. If this keeps up it'll be something like a trillion bucks a week by Christmas.

[SirNitram]

Eh? How could you not realize it'd start lifting off like a rocket ship when you see the tallies? To spin the line, a few hundred billion here, a few hundred billion there...

But yes. Debt go up. Debt will continue to go up. It's a pity it's being poured into the No Consequences For Bankers hole, but there are worse things on this Earth.

[muse]

Well, it's a much faster rocket ship than I thought. I kinda pictured one of those old 1960's rockets which ponderously lifts off the ground before slowly gaining speed and zooming away, while reality is more like one of those cartoon rockets that zip right off the launch pad and vanish in seconds.

[Big Phil]

2008 was already looking to be a record budget deficit year (on the level of $500 Billion), and then there was that $700B bailout, and the economy has tanked. This wouldn't be nearly as concerning if any politicians were talking about paying it down, but NOBODY is doing that.

[The Yosemite Bear]

Wait I thought they had fixed the national debt under Clinton?

[Big Phil]

Wait I thought they had fixed the national debt under Clinton?

Was that a serious statement? I hope you're not really that clueless.

Clinton ran a budget surplus three of his eight years, and began paying down the national debt, but in no way did he "fix" the national debt.

[Samuel]

Wait I thought they had fixed the national debt under Clinton?

Sort of. The debt was slowly decreasing because we had a surplus due to the economy being better than predicted and Clinton to his credit had it used to pay of the debt. That was before the dark times, before the war, before the economy tailspinned...

It is part of Republican ideology to make a large enough debt that the government will have no choice but to slash social programs. I think that we will get very differant results. A future Dutchess would dream of and Shep would approve.

After all, the debt is so high it might be impossible to pay it off. And that leaves open only one option- defaulting. Which could take down the world economy with it.

The future is bright.

[Garlak]

Hmmm.. Is it possible the Republicans are forcing through as much laws, pork barreling, and deregulation as they can before a new President assumes office... and also making sure to stack the deck against him and making it impossible for Obama's plans and programs to go through? So that in 2012 or 2016 they can come in, point the finger at the Democrats, and bleat about how the Democrats let it all go downhill, and that the Real Americans should support the new, reformed Republican party if they want to be dragged out of the mud pit?

Nevermind that it would be due to Bush that the new POTUS would be unable to dig us back out... it'll be 4-8 years down the road, and by then the Republican party may have reorganized if it had fractured like we expect/hope it would... Basically, blame it all on the Democrats and sweep under the rug any responsibility. Lie, misinform, and mislead; their favorite tactics, right?

Or am I just being paranoid and pessimistic? It could "just" be a last attempt to throw around as much power as they have left, because they realize they won't hold it for long nor regain it any time soon, and there's nothing they could do in the short time period to regain support?

[The Romulan Republic]

Hmmm.. Is it possible the Republicans are forcing through as much laws, pork barreling, and deregulation as they can before a new President assumes office... and also making sure to stack the deck against him and making it impossible for Obama's plans and programs to go through? So that in 2012 or 2016 they can come in, point the finger at the Democrats, and bleat about how the Democrats let it all go downhill, and that the Real Americans should support the new, reformed Republican party if they want to be dragged out of the mud pit?

Nevermind that it would be due to Bush that the new POTUS would be unable to dig us back out... it'll be 4-8 years down the road, and by then the Republican party may have reorganized if it had fractured like we expect/hope it would... Basically, blame it all on the Democrats and sweep under the rug any responsibility. Lie, misinform, and mislead; their favorite tactics, right?

Or am I just being paranoid and pessimistic? It could "just" be a last attempt to throw around as much power as they have left, because they realize they won't hold it for long nor regain it any time soon, and there's nothing they could do in the short time period to regain support?

Its really hard to be paranoid about the intentions of the Republican Party. However bad you think they are, they have a way of sinking lower. Frankly, it wouldn't suprise me if they were trying to screw over the next President. Of course, there's always simple greed. These politicians are also often bussinessmen you know, so its only natural they'd try to get through as much deregulation as they can, while they can.

[Darth Wong]

Funny thing about human psychology:

When a problem is small, nobody thinks it's important enough to bother fixing.

When the problem grows, people start to worry about it, so they're more likely to fix it.

But if the problem becomes huge, people think it's hopeless, so they don't bother trying to fix it.

[FireNexus]

Funny thing about human psychology:

When a problem is small, nobody thinks it's important enough to bother fixing.

When the problem grows, people start to worry about it, so they're more likely to fix it.

But if the problem becomes huge, people think it's hopeless, so they don't bother trying to fix it.

This principle is shown at work by the current cleanliness of my bedroom. More seriously, this is definitely something I've seen at work. Of course, I'm more apt to become paralyzed by despair than most, but even the most well adjusted people I know have a tendency to freeze in place at too big a problem.

[Surlethe]

Not that it's wise fiscal policy, but the US can manage an $11 trillion debt with a GDP of $14 trillion; this increase means that the debt has gone from just under 70% of GDP to just under 80% of GDP in the last few months. It's big, it's growing, it's not wise, but it's not the end of the world, either: to look at some other first-world nations, Japan has a debt of 170% GDP, Canada has a debt of about 64% GDP, the UK has a debt of about 44% GDP, Germany has a debt of 65% GDP, and France has a debt of 64% GDP. Mind, that's public debt and not private debt, but it seems to indicate that while the US has a larger-than-average public debt, it's not as large as you might think when taken in the context of our GDP.

Interestingly, in 2001 when Bush took office, the debt was $5.7 trillion and the GDP was $10.1 trillion (nominal). So when Bush took office, the debt-per-GDP was about 56%. Since then, it's just about doubled. "Fiscal conservative", indeed.

Doing some digging, here is the CIA world factbook on debt as a percentage of GDP.

[Sea Skimmer]

I’d figure between the bailouts and government stake in banks, which combined is over 1.1 trillion now, and the decline in tax revenues from the economy tanking were probably looking at more like 1.5 trillion in new debt in the last four months of 2008. I have no idea how this kind of deficit is going to be dealt with. Even terminating the Iraq war AND cutting the rest of the defence budget by 20%, 100 billion dollars, we’d still only save about 250 billion a year… which is a big step… but what to cut for the other 250+ billion? That 20% of the defence budget will be hard enough. At this point we’d have to raise taxes just to keep revenue levels flat, so that doesn’t seem like a viable means of actually stopping the increase of debt at the moment.

I have zero belief that Obama will make any hard choices on cutting programs to do this. In fact I fully expect him to do what every politician does, blame it all on the last guy, then do nothing to solve it instead focusing on his own agenda which includes tax cuts and new spending.

Surlethe is right that the US can handle this surge in debt… in fact as a percentage of the economy the debt is still going to be less then it was in WW2 and the 1950s, but back then only the US’s utter economic dominance of the bomb damaged world let it avoid being crippled. These debt figures also don’t include the huge unfunded liabilities the US has for its existing entitlement programs like social security and Medicare, and such liabilities are only likely to grow.

[Admiral Valdemar]

Total unfunded liabilities are well over fifty trillion, that's nearly the total global GDP. The US could cut all non-essential spending and raise taxes to 100% and the interest would still kill any ability to get on top of this problem.

The government and people need to cut way the fuck back. It's just that simple.

[Surlethe]

I understand that running deficits is healthy in an economic downturn, so I'm not as worried about the future of the public debt (even deflating, our debt could double and we'd still be okay, a la Japan) as I am about the private consumer debt. That's what could really bite us in the ass, especially in a deflationary situation: not a government default, but widespread consumer defaults on private debts, like what happened with the subprime mortgage market.

Total unfunded liabilities are well over fifty trillion, that's nearly the total global GDP.

Two questions: (a) what are unfunded liabilities? and (b) do you have a source?

As far as social security goes, I believe Nitram has a sourced argument that SS is not and will not be insolvent.

[J]

Not that it's wise fiscal policy, but the US can manage an $11 trillion debt with a GDP of $14 trillion; this increase means that the debt has gone from just under 70% of GDP to just under 80% of GDP in the last few months. It's big, it's growing, it's not wise, but it's not the end of the world, either: to look at some other first-world nations, Japan has a debt of 170% GDP, Canada has a debt of about 64% GDP, the UK has a debt of about 44% GDP, Germany has a debt of 65% GDP, and France has a debt of 64% GDP. Mind, that's public debt and not private debt, but it seems to indicate that while the US has a larger-than-average public debt, it's not as large as you might think when taken in the context of our GDP.

I'd argue that the debt to GDP ratio isn't that great of a measure to look at, rather, I'd place more importance on the debt to revenue ratio which is analogous to the debt to income ratio which banks use for approving loans. A country running a high debt to revenue ratio is going to take a long time to pay of its debt, and if the ratio is overly high it will be unable to pay off its debt, ever, as the interest payments will eventually exceed its revenue.

Using Canada as an example, we have total revenues of around $245 billion and a total debt of $457 billion, for a debt to revenue ratio of 1.87:1. Recall that a prime mortgage borrower has a total debt to income ratio of around 3:1 and has essentially no risk of defaulting on the debt, by that measure Canada is doing exceedingly well. As of 2007 the US had revenues of $2.57 trillion and a debt of $9 trillion, giving a ratio of 3.5:1, which if you were a borrower would put you right on the edge of prime, and only if interest rates are low. Assuming revenues are the same this year the current ratio would be over 4:1, that's subprime, and we all know what's going on with subprime loans these days.

If the ratio gets out of hand the US could face default, just like a subprime homeowner.

[Admiral Valdemar]

Two questions: (a) what are unfunded liabilities? and (b) do you have a source?

As far as social security goes, I believe Nitram has a sourced argument that SS is not and will not be insolvent.

The liabilities are just what Skimmer mentioned, such as medical programmes and SS. This problem has been flagged by the GAO and a former treasury comptroller under Clinton and Bush (Walker was his name, IIRC).

A lot of these things are debts that have been waiting for years to be factored in to the equation, since now the baby boomers will be retiring and there are plenty more living in the States today. The addition of Iraq and there bailouts makes you wonder how they'll prioritise such spending and how long it can go on for.

Not to be outdone, the UK will be running up another few hundred billion over the next few years on importing gas alone. So much for that surplus we once had.

[Guardsman Bass]

We've still got a lot of ways to go before we get to Japan-levels of national debt, but that would be disastrous - Japan's Central Bank has to keep the interest rates low just to keep the government from being crucified by the interest payments on its debt, IIRC.

[Col. Crackpot]

Ballistic? To imply that the national debt has gone Ballistic implies that it is on a curve that will eventually return the the X-axis.... and we all know that isn't going to happen.

[Garlak]

Funny thing about human psychology:

When a problem is small, nobody thinks it's important enough to bother fixing.

When the problem grows, people start to worry about it, so they're more likely to fix it.

But if the problem becomes huge, people think it's hopeless, so they don't bother trying to fix it.

Which is why people try to bring up the problem as often as possible, make vague or frightening statements about how it can/will grow, and do it as dramatically as possible to get the "squeaky wheel gets the grease" effect.

[aerius]

Ballistic? To imply that the national debt has gone Ballistic implies that it is on a curve that will eventually return the the X-axis.... and we all know that isn't going to happen.

Does defaulting on the national debt count as returning to zero?

[The Spartan]

So under Bush the government has run up more debt than every previous president combined without taking inflation into account?

At what point does that become true even after accounting for inflation?