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What's the total debt-to-GDP ratio for the US?

Wednesday, January 14, 2009, 6:38 PM

In response to yesterday's post, titled The crisis explained in one chart: Debt-to-GDP, Lisa G did her homework and then asked a great question:

This debt/GDP % of 403% from 2+ years ago compares to the % in today's post of "340 percent of total GDP. " 

Are these calculated differently or has the percentage actually dropped from 2006?

Any help here? I am getting lost.

Kudos for doing the research and resisting the call to become 'a believer'!  Well done.  There's a perfectly good explanation for all this....

[See the postscript for my take on this.] 

The difference you have surfaced can be explained by what is tossed into the bucket called "debt" and what is, somewhat conveniently, left out.

The 340% cited in the figure yesterday refers to everything that the Federal Reserve collects and calls debt in its Z.1 Flow of Funds report (I focus on the "Level Tables"). This is actual, hard debt that consists of a contractual, legal obligation to repay. That is what I, very conservatively as it turns out, use to compare against GDP.

In the Z.1 report, the total government debt recorded by the Fed, even as late as December 2008, is 'only' $5.80 trillion.   That's because the Fed does not include the debt the government "owes itself" (think about that concept for a minute....), nor does it include any of the outstanding entitlement liabilities of the federal government.

The 400+% Debt-To-GDP ratio that I quoted (waaaay) back in 2006 refers to just the federal government position when one includes both the debt the government owes to itself plus the entitlement liabilities of Social Security and Medicare/caid.  These are not counted by the Fed in the Flow of Funds report because, technically, these are not debts. They are a liability of the US government, but not a contractual, legal obligation so they are not counted as debts.

We are barely talking about the same things in these two examples.  The 340% figure is all credit market debt as counted by the Federal Reserve of which barely 10% of the total is assigned to the federal government.  The 400+% figure is purely the federal government position when one counts all their liabilities.

If this all seems confusing, well, that's the purpose of slight of hand maneuvers.

Now, we all know that the US government has a straight debt obligation of slightly more than $10 trillion.  

But that's nothing compared to the entitlement liabilities fo the US which the Treasury department is kind enough to post in the US annual report every year for those who care to see it.

US_Annual_Report_Entitlement_excesses.jpg

The blue circle reveals that when we only consider entitlement underfunding, the US government is short some $49 trillion dollars.  Meaning that if the US government wanted to be even on the whole deal, they would have to come up with $49 trillion, in cash, today to make it all work out.

The $4.073 trillion figure in the red circle shows that the size of the Net Present Value of the liability grew by some 28% of the total value of our (Fuzzy Number) GDP. 

The red arrow indicates one more way to assess the severity of the situation.  If the entitlement shortfall is some 4 times larger than the economy and it is increasing by nearly 5% per year.  Then for the entitlement shortfall to remain in proportion to economic growth, the US GDP would have to be increasing at nearly 20% per year.

Sorry folks, that's just flat out impossible.  The main reason I refer to the US as "insolvent" is because that's what it is.  This data proves it beyond any shadow of a doubt.  Any solutions by this next administration, or any to follow, must start with this simple conclusion or risk being tagged as a "deck chair rearranger" by future historians.

Why are the entitlement shortfalls not included in the Fed's survey of total credit market debt? Because Congress can modify the rules for the entitlement programs at any time and say "Sorry, no payments!", so technically they are not debts.

I counted and included the entitlement liabilities in my 2006 article because I reasoned that whether the federal government dutifully paid them off or they reneged on them, either way they behave like debt.

If the federal government does pay them off, then they will behave exactly like debt.

If the federal government doesn't 't pay, then the burden of meeting the accrued liability would revert to citizens who would then have to curtail other spending to make up for these shortfalls in their retirement and health care accounts.

Either way, whether the payments are made or reneged upon, they represent a drain on future spending/purchasing power which is a very workable definition of debt.

By the way, under this set of definitions, if we add the entitlement "debts" to the Fed's Z.1 definition of debt, then our Debt-To-GDP calculation vaults to a stunning, unpayable ratio of 680%.  

Where this places the US relative to other countries is more of an academic than a practical consideration to me, although it might be a useful categorization for short to medium term currency trading. But eventually? Does it really matter if the US is 2.5 times vs. 'only' 1.2 times more insolvent than some other country?  Nearly all western countries have been playing the same game by the same rules.

The few who remain solvent tend to be sparsely populated and resource rich.  Exactly where the US was back when it was solvent.

Best,
Chris

 

PS - I squirm uncomfortably at the use of the word "followers" and I doubt I will ever do otherwise.  That's just how I am built.   My entire focus is, and always has been, to nudge people towards thinking for themselves. I have had plenty of opportunities to play the guru role, and I have turned them all down, without exception.  Each of us needs to think for ourselves and come to our own conclusions. If we don't, we' run the risk of using the same thought processes that got us into this mess.

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20 Comments

cannotaffordit's picture
cannotaffordit
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Re: What's the total debt-to-GDP ratio for the US?

Speaking of entitlements.......We know that the S.S. Trust Fund consists of nothing but I.O.U.'s, but I am hard pressed to know exactly what the amount is that SHOULD be in there, had it not been taken out and spent for other things.  Is it true that the S.S. System would be just fine if all that really belongs to its Trust Fund were replaced?   How much would that be?  And, how long would S.S. be stable, if it had all the money back that belongs to it?

kemosavvy's picture
kemosavvy
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Re: What's the total debt-to-GDP ratio for the US?

so when the social security drains their trust fund around 2015 or so, where will they make up the shortfall of money? social security bond auction? maybe more t-bills? will payouts of soc.sec. rely on if investors buy these bonds and the remainder made up for with tax hikes?

capesurvivor's picture
capesurvivor
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Re: What's the total debt-to-GDP ratio for the US?

They could always do the following: 

1. start a means test for receiving SS 

2. raise the age of eligibility

3. raise the SS tax on income or the income ceiling to which it applies

4.come up with some other way I haven't thought of to cancel my 45 years of  payments into the system.

 

SG

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Re: What's the total debt-to-GDP ratio for the US?
cmartenson wrote:

Where this places the US relative to other countries is more of an academic than a practical consideration to me, although it might be a useful categorization for short to medium term currency trading. But eventually? Does it really matter if the US is 2.5 times vs. 'only' 1.2 times more insolvent than some other country?  Nearly all western countries have been playing the same game by the same rules.

The few who remain solvent tend to be sparsely populated and resource rich.  Exactly where the US was back when it was solvent.

Thanks for clarifying this.  Your comments are relevant in at least reinforcing w/r/t USA in financial irresponsibility compared to other OECD.  In line with financial data from posts on Canada, Australia, and New Zealand.

Take home messages for me...

1.)  USA is leading way toward insolvency versus other countries...with obvious ramifications.

2.)  Other countries are following closely behind...so crash will be bigger and wider than many may perceive if no one is responsible (aka "Synergistic Mutual Destruction").  Kinda like lemings going over the cliff.  Though does appear Canada is least worst.

Someday I'll find a silver lining.   Again someday.    Aaah found it...my wife, 5 kids and first grand child!

 

Nichoman 

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azzenstudent
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Re: What's the total debt-to-GDP ratio for the US?

If you remember (maybe not!) 1983, Alan Greenspan chaired a commission to decide what to do about Social Security given the prospective glut of Baby Boomers retiring 25 years hence. They decided (Congress and the president agreed) that raising FICA significantly would take care of that issue. In effect, we decided that SS would no longer be an intergenerational contract. Rather, it would be much closer to an actual trust fund. Reagan signed the largest peacetime tax increase in our nation's history. But! There was not a lockbox. FICA revenue still went into the general fund.

So, what happened? Well, in the late 90s, we started running budget surpluses. Indeed, by 2000, OMB said we would have over the next ten years budget surpluses over $5 trillion. 2000 was also an election year. George Bush ran on the platform of "giving back" to the people their money. What he neglected to tell us what that much of that money was earmarked for Boomer Social Security checks.

In 2001, Alan Greenspan testifed before Congress that the surpluses were too large and actually threatened the economy. This became one justification for rebating to taxpayers much of the annual budget surplus that FICA revenues help generate. If you were paying close attention, you noticed the lion's share of the cuts went to those whose income was in the top bracket. So, huge surpluses, much of them generated by FICA, were then given to the wealthy in terms of income tax cuts.

Notice: FICA wasn't cut. The top marginal rates were cut deeply, and other income tax rates, particularly at the lower end, were all but curtailed. But the working poor didn't pay much in any income taxes as it was. They did pay FICA, however.

Lesson: Alan Greenspan taketh and he giveth away. Notice who he took from and to whom he gave.  

 

 

 

straight's picture
straight
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Re: What's the total debt-to-GDP ratio for the US?

Great Post Chris, thanks. 

The key issue, in my mind, in all human interaction is credibility or faith [honesty?].  Credit is only extended with the faith it will be repaid, the very root of the word credit means faith or belief.  The numbers are practically irrelevant; if people believe in the system then the system stays, numbers be damned.  You can fudge the numbers up or down or you can report them honestly, it still seems to be a matter of faith or belief. Perhaps 340%, 403% or 680% doesn't mean a thing if the faith remains all the same.

Perhaps any system based on faith will only fall with the faith itself.  Who would have believed that a Government could spend a Trillion dollars [we know what that means thanks to CM] in a couple of months!  Yet here we are and here remains the faith. 

Collapse is, in my mind, inevitable.  The time frame is all that is in question. What happens after the collapse is the big question.

Who will take us through the collapse?  Someone will, one way or another.  Our society always seems to personify events like this.  Will it be towards enlightenment or towards darkness?  Which part of our nature will win?

Who will lead us out of the cave past the fire and into the realm of sunlight, the realm of real understanding and acceptance of our true nature?  It is unlikely to be a politician, it wont be a banker.  It will be someone of huge personal integrity, a person with loads of personal physical courage.

The age of the plow, the age of the saw. 

The age that cant be fudged; cant be marked up. 

The age where money cant work for you.  

The age of the walkers not the talkers.

The age of Courage, Integrity, Honesty.  

Now THATS and age I can get excited about.  But alas, it is all a dream and i fear it will remain so as long as we do not understand what got us here.  OUR OWN HUMAN NATURE.

Stewart, Brisbane. 

ps. In my experience the term 'followers' best describes those that follow the dominant paradigm.  It is my experience that those that gravitate towards pages like these are often anything but 'followers'.

Sense Seeker's picture
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Re: What's the total debt-to-GDP ratio for the US?

Thanks for the great charts in which you look not only at the current account balance, but also include intra-government debt, and liabilities. I have a question on each.

 As to the money the government owes to itself, is that real debt? It could be annulled without the rest of the world noticing? Or is the benefit side of that debt included in the regular book-keeping, and the debit side not?

On the future liabilities of the US Govt: if you include those, should you not also include the future stream of income the US Government can expect? Including only future costs but not future income seems unbalanced to me. But tell me if I missed something here.

Mike Pilat's picture
Mike Pilat
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Re: What's the total debt-to-GDP ratio for the US?

Stewart: It's interesting you point to human nature as a cause of this crisis.

If there's one thing I've come to appreciate, it's that many things change over the course of history, but human nature doesn't seem to change at all. That is why the same problems that the Romans had are plaguing us today and it is the same reason why so many (nearly all??) of the quotes of Thomas Jefferson seem to be extremely applicable in our age. It's not that he, or many other sages, had a crystal ball. They just understood human nature very well.

This gets a little philosophical, but I wonder if it is even possible to create or devise a system that is "immune" to human nature? It seems there will always be ways that people learn to cheat the system. 

As to the debt levels of the US government, let's attempt to understand the government's perspective: They really are in a bind. Short term political goals have helped drive the debts to this level with no real end in sight. It will be VERY difficult to deal with the problem now without losing all credibility. If the US Government were to default in one way or another, they will greatly hurt their own relevance in the minds of the people, thus limiting their influence and power to some degree. Of course that's not what they want, but they know that debts can't get up to hundreds of Trillions...or can they?

Sometimes, I wonder if Obama wasn't put forth largely for his excellent political skills. He might be the only hope the political class has of getting us to swallow the default pill without rebelling and forcing the elite into more productive occupations.

CM.com is filled with anything but followers. As a result of this page, I have been inspired and have inspired others. But I stand alone in both my understanding and opinions more often than not. I don't mind it. I despise groupthink and the herd mentality.

Mike

TimesAwasting's picture
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Re: What's the total debt-to-GDP ratio for the US?

What's the % if we change the "cooked" GDP to only $9T? Somewhere in the 650% range or higher? How much can we expect GDP to drop with all the layoffs as the depression worsens? What if the real GDP is only $7T this year?

Yikes!

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Re: What's the total debt-to-GDP ratio for the US?

A great discussion of the effect of entitlements to the liabilities side of the U.S. balance sheet.  One point of potential leverage that I have not heard discussed yet is the discount rate used in the present value calculation that yields the 49T number.   I would like to see the calculation done with some sensitivity testing for the discount rate.  For instance, a simple present value case of any fixed sum 20yrs out gives us this interesting and to me frightening look.  If we were to assume, for this simple present value case, a 5% discount rate used as our baseline, and then proceeded to test for 4% and 3% we would see the present value (liability) jump 21% and 47% respecitvely!  While the entire stream of entitlement revenues and expenses would need to be known to properly run the calculation, the implications are that a potentially much higher present value liability would result.  If, however, the 49T figure was arrived at using a 0% discount rate (essentially the correct number for a a pay as you go system) then the number simply reflects the sum of all expected revenues and expenses of the entitlement programs. The result should then be as accurate as the assumptions used to project the respective increases (decreases) of the revenue and expense streams.  Bottom line - I would like to know what the present value discount rate used to arrive at 49T is.

 

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Re: What's the total debt-to-GDP ratio for the US?

Even with everything crapping out all around us, energy is still a huge issue to attempt to keep our eyes on.

My simple view is that we (society) can do almost anything with energy and almost nothing without it. 

 "Imagine what's going to happen when the bourgeois realizes that the proletariat-controlled elite (Washington) not only is soaking them for everything, but also driving the whole kit 'n kaboodle over a cliff. From a historic perspective what you usually get out of that kind of mess is a revolution and a nasty dictatorship. The old saw that “you can’t spend your way out of debt” never seemed more true."

 IOUs Perverse Communism

http://tinyurl.com/8kt2rz

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Re: What's the total debt-to-GDP ratio for the US?

Mike,

Read Walden II by B.F. Skinner.  Living in a community and "controlling" human nature.  The fact is, just living life we are controlled in one way or another.  Oh, and politicians serve a term and can NEVER serve again.

Get the money out of politics and make term limits.

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Re: What's the total debt-to-GDP ratio for the US?

I think the true solution will become obvious once it's implemented-- the cold, calculated value of a human life will drop to zero (in the eyes of the "health care czar") once a person reaches retirement age. SS will remain, but health care will become a waste of money, significantly shortening the lifespan of retirees. I have heard a number of times, on the Crash Course, and in the news, that people are living much longer that they used to. This is why the retirement age has been pushed out. Shorten their lifespans, then the liability of these entitlement drops drastically.

grl's picture
grl
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Re: What's the total debt-to-GDP ratio for the US?

Thank you so much for the explanation Chris!

raptor's picture
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Re: What's the total debt-to-GDP ratio for the US?

hmm..

I have always tought that if this crisis goes from bad to worse globally this in a sense will "make" more people die either trough War, revolutions, lower living standards, plague or something along the lines. I think the last century of overexpansions was mostly and indirectly connected to constantly expanding money supply (worldwide).

We have to either hit a "plato" or "decline" in consumption and expansions, so we can consolidate/recycle/reinvent ourselves before we start expanding again.

If somehow the politician+banksters can avert the crisis for a prolonged time (printing more money), it will be just bigger crisis. This in some masochistic line of thought can be a good thing, because it will force populations to shrink and teach us a lesson to live within our means, which as we see these days is very hard to do when presenting ppl with facts and logic.

The question is how much we can expand, so that after the crash the fabric of society still holds. We as society will either be enlightened by the initiatives like the Crash course and will do this voluntary OR be forced to do so by the uninformed an stupid decisions the politicians make today. 

Even if we avert the current crisis the collapse will come when we overpopulate Earth anyway... I don't know when it may happen when we are 10 Billion people , 20, 30 ... how much ppl Earth can sustain !! but as the exponential function shows every year that pass takes us closer. At the moment we push the "Earth ecosystem" further it will come back with a vengeance.

If we are ever to start expanding again after the crash we have to start looking at colonizing the solar system.

If all the buble money went into exploration and green tech, we would be in much better shape now. 

if, if , if .... :)

We really are in dire need of some very big technology breakthrough or may be ideological one that will alter our live in dramatic way (not necessary bad one, still dreaming ;) ).

 

 

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Downrange
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I never cease to be amazed...

.. at the ability of people to descend into us vs. them politics, especially so along generational lines.  The X gen seems particularly susceptible to this kind of thinking, I have noticed.  I suppose it would be too obvious to point out to people in their thirties and forties today that they will be "retirement age" someday soon, and will need to have their "lifespans shortened" too.

Ahh, the human brain its wonders to perform...

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Re: I never cease to be amazed...

Downrange,

To whom does this refer?

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Re: What's the total debt-to-GDP ratio for the US?
Quote:

In the Z.1 report, the total government debt recorded by the Fed, even as late as December 2008, is 'only' $5.80 trillion.   That's because the Fed does not include the debt the government "owes itself" (think about that concept for a minute....), nor does it include any of the outstanding entitlement liabilities of the federal government.

I'm confused. I just downloaded the same report and it shows "Total Credit Market Debt Owned by the Federal Government" as $6.36 Trillion in Q4 of 2008. Did they revise that number since the orignal post?

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Re: What's the total debt-to-GDP ratio for the US?
okubow wrote:
Quote:

In the Z.1 report, the total government debt recorded by the Fed, even as late as December 2008, is 'only' $5.80 trillion.   That's because the Fed does not include the debt the government "owes itself" (think about that concept for a minute....), nor does it include any of the outstanding entitlement liabilities of the federal government.

I'm confused. I just downloaded the same report and it shows "Total Credit Market Debt Owned by the Federal Government" as $6.36 Trillion in Q4 of 2008. Did they revise that number since the orignal post?

okubow,

I don't think Chris was saying Q4 2008 is $6.36 trillion.  His words were "even as late as December 2008."  In late December 2008, the Q4 08 numbers would not have been published; I'm sure those are not made available until sometime in the following quarter.  In December 2008, Chris would have been referencing the most recently published number, which was Q3 of 2008.  The Q3 2008 figure is .... $5.80 trillion.

Ron

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Debt to GDP ratio

Wait a minnit! I'm confused. Re: Table 3, the author states "Meaning that if the US government wanted to be even on the whole deal, they would have to come up with $49 trillion, in cash, today to make it all work out."

1: Over what time period is the $49 trillion calculated? Do the calculations include the possibility of inflation/deflation?

2. On what basis does the author claim that the government would have to "come up with $49 trillion, in cash, today"? If the obligation is calculated over 50 years, wouldn't it be more informative to say so? Perhaps even do the math and include the result: $1 trilliojn a year. Of course, that's a huge total--a trillion dollars added to each years budget--but at least it puts the problem in a contemporary setting where the comparison to current budget deficits ($1.6 trillion?), or to current revenues and tax rates, at least makes some sense. Who can deal with $49 trillion due today?

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