Key facts about federal debt you might have missed.

Our national debt is once again in the news, since it has supposedly reached a staggering $40 trillion. I say "supposedly" only because that's not really true. $40 trillion is the amount of Public Debt Outstanding, which includes $7.75 trillion of Intergovernmental Holdings (which means the debt that one branch of the government owes to another). The true measure of federal debt is Debt Held by the Public, which is now $32.3 trillion. You can see the history of all these numbers here. 

I offer the following charts—some of which you've likely never seen before—to help one understand our national debt and its implications.

Chart #1

Chart #1 shows a long history of federal debt owed to the public. It's plotted on a logarithmic scale so you can appreciate how fast or slow it's been growing over time. Over the period shown, federal debt has increased by an annualized rate of 8.8% per year. Note that the growth of federal debt in recent years is not very different from what it's been over the past seven decades on average. 

Chart #2

Chart #2 shows the evolution of federal spending and federal revenues since 1990. It's also plotted on a logarithmic scale. The difference between the two lines is the federal deficit, which in the past 12 months has totaled $1.95 trillion. Note that spending has slowed dramatically since 2022, while revenues have been grown significantly in the past few years.

Chart #3

Chart #3 shows federal spending and federal revenues as a percentage of GDP. The dashed lines show post-War averages for both. Federal revenues relative to GDP today are only slightly lower than they have been for many decades, but federal spending is substantially higher. From this fact alone it's not a stretch to say that the main reason we have a large federal deficit is that federal government is spending very high from an historical perspective.

Chart #4

Chart #4 shows federal revenues as a percentage of GDP vs. top federal income tax rates. Remember the hue and cry when President Reagan slashed tax rates in the 1980s? Supply-siders like Art Laffer argued that lower tax rates would be such a stimulus to growth that revenues would remain strong. Left-wingers argued that the deficit would explode. Based on this chart it's easy to say that if anything, lower tax rates led to a surge in tax revenues from 1983 through 2000. It's the Laffer Curve in action; if tax rates are too high, then lowering them will lead to more growth, rising real incomes, and higher tax revenues. Tax rates were clearly too high in the decades leading up to the 1980s.

Extrapolating from Charts #3 and #4, the worst thing the federal government could do to reduce the deficit is to raise tax rates. Lower spending is the only sensible course of action.

Chart #5

When people speak about the burden of the federal debt, they usually refer to the size of the debt relative to the size of the economy. That's shown in Chart #5. Today federal debt is a smidgen less than the size of our economy. It's only been higher during WW II. But that's not a good measure of our debt burden.

Chart #6

Chart #6 shows federal debt as a percentage of GDP, which is the correct way to measure the burden of our debt. Note that it was much higher in the 1980s than it is today. That's because interest rates were much higher back then than they are today. Example: having a mortgage that is equal to 30% of your annual income is much harder if mortgage rates are 8% than if they are 6%. Chart #7 gives you the history of 10-yr Treasury yields to help keep these facts in perspective.

Chart #7

Is our federal debt out of control? a ticking time bomb? No. It's still manageable, but we would all be much better off if the federal government downsized its spending and reduced our tax and regulatory burdens. 

Jobs growth picking up a bit

The June payroll data released a few days ago bolsters the thesis that jobs growth is picking up. Jobs growth is still modest by historical standards, but it is improving, not deteriorating, and that is significant. 

Chart #1

Chart #1 shows the year over year and 6-mo. annualized rate of growth of private sector jobs. Given the volatile nature of month-to-month rates of change of this statistic, I think it is best to view it from a multi-month rate of change perspective. We now see that by both measures, jobs growth is picking up a bit. But at best, the current rate of growth is still less than 1% per year. 

Chart #2

Chart #2 shows the level of private sector and public sector jobs. Here we see that private sector jobs have picked up a bit, whereas public sector jobs have lost ground in the past year or so, thanks to Trump's efforts to downsize the federal bureaucracy. 

I don't see anything here that would justify or warrant a change in short-term interest rates. The economy is not on the verge of a sudden acceleration, nor is it on the verge of a downturn. 

Meanwhile, key indicators of inflation pressures bolster the case for lower inflation: non-energy commodity prices are down 4.5% from their pre-Iran levels, 5-yr breakeven inflation rates have fallen to 2.3% from an Iran-war high of 2.75%, and gold prices are down 10% and the dollar is up 3.5% since the end of February.

Interesting chart updates

We're back from a long trip to Argentina. Since we were there two years ago, the only thing that has changed in a meaningful way is the peso, which has effectively appreciated by a significant amount—another way of saying that the prices of just about everything have gone up a lot in dollar terms. The exchange rate back then was 1500 pesos to the dollar, and it's the same today. But there has been inflation (in peso terms) of 40-50% in the intervening two years. This has been made possible by a 50% increase in the central bank's foreign exchange reserves in the past two years. The central bank has been buying up a portion of the dollars that have been pouring into the country. I see lots and lots of new foreign investments coming into Argentina, and these will translate into more and more jobs and prosperity in the coming years.

Other than that, there are interesting parallels between Argentina and the United States. Prices are up, lots of people are complaining, jobs are hard to find, and a lot of people are upset with their president. Fortunately, no one is talking about a coup or the possibility that Milei will reverse course. Meanwhile, life goes on, there's plenty of traffic, the food is delicious (wine, notably, is very cheap and very good), and the people are extremely friendly. We took a 3-day side trip to Cafayate, which is the #2 wine region in the country. It's in the northwest part of Argentina, near Salta. It's gorgeous and worthy of a visit for anyone who loves wine and mountain views. (Our favorite winery, San Pedro de Yacochuya, is located at about 7,000 feet elevation.) I did note, however, that restaurants are not packed at 10:30 pm as they would be if everything were normal. 

What follows are some charts I've been working on in the past few days. Nothing of great concern emerges from this review. Inflation fundamentals haven't changed, the economy is doing Ok (1.5-2% real growth), corporate profits are tremendous, and there are no signs of a looming recession or even a slowdown. 

Chart #1

In the past several months there has been a notable pickup in the growth of the M2 money supply. So far it's nothing to be concerned about, especially in an historical context. But it bears watching.

Chart #2

Chart #2 is my way of calculating the demand for money: it's the ratio of the M2 money supply to GDP. It hasn't changed much in the past few years, and is only marginally above pre-COVID levels. I would be concerned if it were falling, since that would imply that the Fed would need to increase interest rates in order to persuade the market to hold money instead of spending it. 

Chart #3

Chart #3 shows the growth trends of the three main components of the Personal Consumption Expenditure Deflator, the Fed’s preferred measure of inflation. Note that durable goods prices (cars, appliances, etc.) have been unchanged since 2022, while non-durable goods (food, clothing, gasoline, etc.) prices have also been largely unchanged EXCEPT for the last few months, during which time the Iran conflict has boosted energy prices. Inflation in recent years has been driven primarily by service prices, which in turn have been driven primarily by labor and shelter costs. 

Chart #4

Chart #4 compares the number of job openings to the number of job seekers. This suggests that labor market conditions haven't changed much in the past two years. No boom, no bust. No abundance of new jobs, but no contraction either.

Chart #5

Chart #5 shows the level of nominal and real (inflation-adjusted) housing prices in the United States. In real terms prices have actually declined a bit in the past several years, while in nominal terms prices have been rising at a slower and slower pace. It’s clear to me that we are seeing top in prices, which will likely be followed by a period declining prices. It's often said that the housing market goes through cycles like this about every 10 years. And of course, with declining prices, shelter costs will be declining and contributing to lower inflation. 

 

Chart #6

Chart #6 compares the prices of bitcoin and the S&P 500. Bitcoin prices are down by two-thirds from their high last year, while equity prices continue to rise. As the chart notes, holders of bitcoin have lost about $2 trillion since the peak. Ouch. I have been a resolute bitcoin skeptic for a long time, and I'm tempted to say that we haven't seen the worst yet. Bitcoin was never more than a speculators' game that had some mathematical credibility but little else. Given its volatility to date, it is not a reliable store of value nor a hedge against anything. Bottom line: bitcoin has no inherent value.

So: what does this mean? I am an inveterate optimist, so I tend to see this as a good thing. Speculators are getting whupped, and they are being forced to retreat to good old-fashioned things that are tied to productive assets and productive activity. That's another way of saying that the bitcoin bubble popping is generating an increased demand for money. At the very least that further suggests that the Fed does not need to raise interest rates; with no change in rates but a big upward shift in money demand, monetary conditions in the US are effectively tightening. That's one more reason why I think inflation fundamentals remain intact and sound.

Chart #7

Chart #7 shows the ratio of corporate profits to GDP, which now stands at a record all-time high. Note how the ratio in recent years has been about twice as high as it was in the 70s and 80s. That is a huge deal. No wonder the stock market is doing so well!