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Yesterday Treasury released budget stats for the month of May '20, and they were, as expected, godawful. A simple virus, potentiated by aggressive shutdown mandates, has caused government spending to explode and revenues to crater. Measured on a rolling 12-month basis, the federal deficit in the past two months has more than doubled, reaching the obscene level of $2.126 trillion, and it will be higher still when the June numbers are tallied. Our national debt now stands at $20.1 trillion (the correct measure being the portion that's owed to the public). As a percent of GDP, our national debt is about as high as it was during the height of World War II—about 110%, and that's as high as it's ever been in recorded history.
The raw numbers are frightening, to be sure. But we are not doomed yet. The charts tell the story:
Chart #1
Chart #1 shows the 12-month moving average of federal spending and revenues. The past two months show a very sharp—but not unprecedented in size—deterioration in each from their long-term trends.
Chart #2
Chart #3
Chart #3 shows federal revenues by month for the current and two previous years. The shortfall in April revenues was gigantic.
Chart #4
Chart #4 shows the federal deficit as a percent of GDP, with the nominal value of the deficit (green) highlighted in green. I've calculated the value for Q2/20, but my estimate of actual number, which won't be available for over a month, is only very approximate. I'm assuming GDP in the second quarter declines at a 40% annualized rate. But it's highly likely that this quarter's numbers will be the worst in history, as the chart suggests.
Chart #5
Chart #5 shows federal debt held by the public (the correct measure excludes debt owed to the social security system). Looked at using a log scale for the y-axis over a long period, the growth of debt does not look all that unusual.
Chart #6
The huge jump in federal debt relative to GDP (Chart #6) is due not only to the big increase in debt outstanding, but also to the unprecedented decline in nominal GDP in the current quarter. We are revisiting the huge debt levels registered near the end of World War II. We survived that episode of massive indebtedness thanks to a slowdown in spending and a surge in economic growth. We could see a repeat of that performance in the months and years to come.
Chart #7
Chart # shows the true measure of the burden of our federal debt: interest payments on the debt as a % of GDP. It should come as a shock to most people: how can the burden of debt be so low when the actual debt is at record levels relative to GDP? Answer: it's because interest rates on the debt are at historically low levels. If interest rates remain low for the next two years, as the Fed recently predicted, and the economy recovers and federal spending is reined in, it should be easy to avert disaster.
The burden of federal debt is calculated the same way you would measure a household's debt burden: by dividing annual debt service payments by annual income. Overall, and as a nation, we are currently spending about 3% of our annual income on our national debt. In the great scheme of things, that is a drop in the bucket—rare is the household with such a low debt burden!
13 comments:
Interesting post.
It sure seems like the United States, Japan, and a few other nations can buy back national debt without consequence to domestic inflation or the domestic economy.
I realize that this proposition is heretical. But the experience of Japan and the United States in recent decades suggests heresy is an option.
Hi Scott. How Much of the debt is held by the Fed and what happens to it (does the government pay interest on that part and are those loans automatically rolled over)?
Currently, the Fed holds $4.1 trillion of Treasury securities, or about 20% of the outstanding stock of marketable Treasury securities. At the end of 2019, the Fed held about 14% of marketable Treasuries. The Fed held 20% of marketable Treasuries in 2015 and in 2003, so the current level of Fed holdings is not unprecedented.
The Fed receives interest on those securities, just as anyone would who owns them. The Fed pays interest on the bank reserves it has issued in order to purchase those securities. Any excess of interest received over interest paid, minus the Fed's operating expenses, is paid to Treasury at the end of each year. Last year that amount was approximately $70 billion. The Fed typically rolls over maturing securities, unless it has adopted a policy of not doing so in order to gradually shrink its balance sheet. For now the Fed is rolling over maturing securities.
The Federal Reserve does in fact pay interest on commercial bank reserves, but is not obligated to. The payment of interest on reserves is a relatively recent development.
A cynical observer might suggest the Federal Reserve is a regulatory agency that has been somewhat captured by the commercial banking system.
The stated reason for paying interest on reserves is to curtail bank lending, which if left uncurtailed might lead to an inflationary boom.
Given that the US has just unemployed 40 million people, I would welcome any boom, whether attended by inflation or not.
Whatever your politics, or monetary theories, getting 40 million people employed again should be a monomaniacal obsession.
After 40 million Americans are re-employed, I might have the inclination to worry about Afghanistan, Covid 19, police brutality, inflation or how many troops are in Germany.
Scott love your work but shouldn't we be questioning the President which you support. Any government that spends excessively while cutting taxes during a time of prosperity (pre COVID) should be called out. But Don doesn't give a rats axx. Like his previous business ventures its OPM (others people money) and he knows the way to get elected is grow the economy and a strong stock market at all cost.
I am in Canada and the deficit is atrocious and some of the covid gov programs are reckless such as all college students receiving $1300 a month for four months with no qualifications - it doesn't depend on their parents income. The cdn government is buying votes like Trump is but both on the opposite spectrum. At least the Cdn government were elected as a left wing party - something to be expected by the left handing out money at the cost of deficits. Trump knows the democrats cannot challenge him on spending and deficits so our children get to inherit the mess. Maybe our children can stop worrying about climate change and start worrying about government debt.
Stop kicking that can.
You are not addressing total debt, public, private, corporate etc.
Our working population is aging, we seek to prevent immigration and even Jay said they are crossing some red lines
All is rosy, not buying it.
It's only been the last three years or so that I've started worrying about the debt. Yes, the debt/GDP ratio is daunting. But even worse is the idea that we seem to have lost the very political mechanism by which we would fix the debt situation.
The last three presidents, and their congresses, have been unmitigated disasters. Everything is used as an excuse to spend wildly and on all the wrong things, if you ask me. It would be funny if it weren't so serious.
And we also seem to have lost the recipe for economic growth. Even after Trump's tax cut, combined with specific incentives to spend on capital, combined with a significant repatriation of dollars, we couldn't get to 3% GDP growth. It's pathetic. As you have frequently shown, before the GFC this country AVERAGED 3.1% growth going back to 1960.
Even pre-COVID we were starting to see signs that bad money (debt) was crowding out good money (productive investment). Capital spending just can't seem to get off the mat, no matter what. Monetary velocity has moved straight down for twelve years. Animal spirits seem to have achieved something of a quasi-permanent doldrum status.
Let us not forget that this titanic problem was brought about by one of the truly bipartisan efforts that we've sustained in this country. The economic idiocy of the Left need not be detailed. But Reagan came into office with a 27% debt/GDP ratio. Every single Republican president since and including RR has contributed mightily to the problem. And until someone shows an interest in addressing the Big Four buckets - Medicare, Medicaid, SocSec, military - then I don't see much hope. Btw, all of these are considered third rails.
On a "positive" note, our debt situation remains superior to that of Europe, Japan, and China. So really big money isn't likely to abandon the US any time soon. Party on...
The Fed wants low rates for two years, but what would they do if we get inflation? In the current next 12-24 months is inflation even a worry?
Thanks for the explanations Scott. 20% is a lot but I'm surprised it's a level reached that recently before. I guess we'll have to see how it goes from here.
Interesting analysis.
I think that the key metric that would signal that the deficit and debt situation is at a critical point, where drastic and immediate correction is needed, would be the election of a Democrat President.
If the Democrats should somehow manage to simultaneously control the House, Senate and White House, the debt situation will become even more perilous. Repeal of the income tax will probably be the only practical way to stop all of the wasteful deficit spending at that point.
Good read. Great tips!
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The April shortfall may to some extent be the delay in when income taxes were due, if I understood how that worked..
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