Thursday, January 12, 2012

Federal finances update

With today's release of December federal budget numbers comes good news and bad news. The good news is that federal spending is not growing very much and is shrinking relative to GDP. The bad news is that revenue growth has also slowed, and the deficit continues to be well north of $1 trillion per year.

Since the end of the last recession, federal spending (on a rolling 12-mo. basis) has increased only 4.1%. Revenues, in contrast, have increased 6.8%. Both have slowed down in the past six months.

In relation to GDP, spending has declined from a peak of 25.3% in Sep. '09, to 23.3% as of last month, by my estimates. Revenues have increased from a low of 14.5% in Mar. '10 to 15.1% as of last month.

As a result, the deficit relative to GDP has declined from a high of 10.4% in Dec. '09 to 8.1% as of last month. On a nominal basis, the 12-mo. deficit has fallen from a peak of $1.48 trillion in Feb. '10, to a current $1.25 trillion. If current trends continue, the deficit is likely to continue to decline—albeit slowly—relative to GDP. It will likely remain very high for the foreseeable future, but at least it is going to be less than the 9% which studies have shown is the critical level above which deficit-financed spending can lead to a weaker and weaker economy and an unstable outlook.

This chart shows federal debt outstanding owed to the public, which is a better measure than the oft-cited total federal debt which has now reached $15.2 trillion, almost the size of current GDP (which I estimate was about $15.4 trillion at the end of last year). That's because total debt includes about $4.8 trillion which is "owed" to social security; debt that the government owes to itself is not the same thing as debt that is owed to someone else—it's just an accounting fiction. The last datapoint in the chart is my estimate of what the true federal debt will be at the end of this year, based on current trends in spending and revenues. In the four years ending Dec. '12, I project that the federal debt will have increased by $5.47 trillion, or 86%, to $11.8 trillion. Federal government debt will have almost doubled in just four years. The only good thing that can be said about this is that the rate of growth in the debt is declining, albeit only slowly.


Benjamin Cole said...
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Benjamin Cole said...

Okay, the USA tried fiscal stimulus---but if the Fed pulls out the rug, then your federal fiscal stimulus is roadblocked by tight money.

That, indeed, is what the Fed has done. It has passively tightened the money supply. We are building up debts to no effect.

Better yet would be a balanced federal budget and more-aggressive monetary stimulus. The Fed should be far more aggressive with QE. If you follow the Taylor Rule you get negative interest rates today.

Since there is no such thing as negative interest rates, you have to go to sustained and aggressive QE.

Or you can end up like Japan.

Donny Baseball said...

That is why I see TBT as "Obama Re-election Insurance". If he is re-elected, do we really think that we won't have four more years of $1T deficits? $10T in 8 years. Wow. I may be wrong, we may be able to handle $20T in debt just fine. But I'm not banking on it. Treasury yields will skyrocket.

Public Library said...

Here's a good article from mises about twin deficits. The party will continue unabated until it screeches to a halt.

The twin deficits — trade and federal — are linked. They are linked by

1.the mercantilistic central-bank policy of inflating the domestic currency in order to buy IOUs from the US government, and

2.the Keynesian policy of increasing US government spending by borrowing.

We have two fiat-money governments specializing in what each does best. The Asians specialize in lending fiat money to buy fiat promises. Congress takes advantage of this blindness of Asians. Both sides say, "Let's party!"

The winners are American consumers — for as long as the party continues.

Public Library said...

William said...

Scott Grannis wrote: "That's because total debt includes about $4.8 trillion which is "owed" to social security...."

I am confused by this wording. I thought that excess Social Security taxes were "invested" in US government bonds, meaning that when needed the Social Security Administration would sell the US bonds to other investors in return for cash to pay recipients i.e. in 2016.

What actually is the mechanism for this? I was lead to believe that whenever SSA did sell their bonds it might create a kind of "glut" on the market - (as if there isn't a glut now).

Scott Grannis said...

Donny: Bear in mind that Japan's deficits and total debt far exceed ours as a % of GDP, and their bond yields are lower. The major determinant of bond yields is inflation.

Scott Grannis said...

William: Social security receipts are thrown into the same pot from which all spending comes. The SSA effectively gets an accounting entry to reflect that they have a claim on future government revenues, equivalent to a bond. Whether the SSA sells its bonds in the future, or whether Treasury sells bonds in the future to cover required SS spending makes no difference. The money has been spent and the government will either have to borrow to make SS payments or increase taxes.

Or think of it this way: Instead of investing social security receipts in something tangible, our government uses the money to fund current spending, and promises to come up with the money in the future. Future social security payments thus become something like government obligations. With one important caveat: no one has a right to receive promised social security benefits.

marmico said...

In the four years ending Dec. '12, I project that the federal debt will have increased by $5.47 trillion, or 86%, to $11.8 trillion. Federal government debt will have almost doubled in just four years

If Obama is re-elected and tries real hard he might be able to duplicate Reagan who managed a 78% increase in the public debt in just four fiscal years and a 195% increase in eight fiscal years. LOL

McKibbinUSA said...

The good news is that the economic picture along Main Street is much clearer than along Wall Street -- for we mortals (ordinary investors), cash is scarce (try to get a loan without collateral), property values are down, real wages are down, and the availability of jobs is down -- all of that means we are enduring depression along Main Street USA -- what ordinary investors should be doing now is buying rent-earning(i.e., occupied) real estate, and dividend-paying (i.e., income)stocks -- those with jobs (and especially government workers) should be starting cash-earning businesses on the side just in case they lose their jobs -- those without jobs should immediately relocate to whereever they can find a job -- everyone should be adding skills (rather than experience) to their resume -- with discipline and a long-term investment horizon (i.e., 15-25 years out), ordinary investors can weather this depression and set themselves up for the good life down the road -- what investors should not do these days is trade stocks and/or flip houses -- as for finding cash, sell property, get a second job, or have your spouse join the workforce and/or get a second job -- cash jobs are out there -- the key today is to not get greedy and try to out think the market in some delusional get rich scheme -- as for Main Street, I am confident that prosperity will return within the next 15-25 years -- saving Wall Street and Federalism is our biggest worry these days -- taking advantage of the Main Street depression is where the opportunities are...

PS: Read books about life during the 1930's and look for clues regarding how ordinary people built thriving empires out of the depression around them...

PPS: Consider the possibility that Federal and State governments as we know them may not survive these tough economic times...

PPPS: Encourage your children to study mathematics, statistics, sciences, and engineering -- refuse to pay for degrees in other majors if their goal is a career in the global economy -- only world-class skills count at this point...

Benjamin Cole said...

Reagan, the Bush and Bush jr. and Obama all bled red ink in gushers.

Clinton (and perhaps the R-Party Congress of the Clinton years) did not.

From this I draw the confusion our parties are not worth voting for.

McKibbinUSA said...

PPPPS: My previous comments above are my way of saying, "take cover..."

L.A. said...

I agree with all of the Reagan, Bush I, Bush II, and Obama statements. Republicans have a horrible habit of excessive spending in defense. Reagan did it. Bush I did it. Bush II did it. Different circumstances and all, but still worth noting that these guys increased spending tremendously.

Obama did also, but again under slightly different circumstances. Defense spending is still there with conflicts in Iraq, Afghanistan, and Libya, but he dramatically increased spending in other areas also.

I'm with Benjamin...Neither party is really worth voting for. This is why a close-to-balanced budget is critical. The federal government needs to be much more efficient in how they do things and work to eliminate waste. This is the fault of both parties.

RichmondG30 said...

I may be obtuse, but I don't understand how you can subtract SS purchases of US debt from "debt owed to the public".

Scenario A: In order to fund his retirement, a private citizen buys US Treasuries as part of his 401k portfolio. This is counted as debt owed to the public.

Scenario B: In order to fund his retirement, the same private citizen sends cash to the Federal Government in the form of SS withholding. The Federal Government immediately turns around and buys US Treasuries.

Both sets of bonds are a liability that the Federal Government owes to a private citizen. One is direct and the other is indirect, but the net effect, it seems to me, is exactly the same.

What am I missing?

Donny Baseball said...

Richmond brings up a point I didn't broach. can the fantastic proprietor of this blog be advancing the Krugmanesque argument that non-bonded debt owed to citizens isn't real debt because we owe it to ourselves?? Don Boudreaux is actually tackling this fallacy over at Cafe Hayek as we speak.

These promises, currently non-bonded debt, are rapidly converting into bonded debt as the baby boomers age. so the we "owe it to ourselves" theory is morphing into we owe it to our actual creditors. Thus this is a massive generational debt burden we are creating.

Plus there are no aggregates. SocSec recipients must collect from SocSec assets. I've never bought a treasury bond in my life and never will. Imagine if everybody was like me, the non-bonded promises could not be funded via debt, it'd have to be through taxes. First you have to raise them and them you got to collect them. This is where you have an inter-temporal problem, actual claimants chasing down cash from from supposed debtors.

Bottom line, the promises won't be kept so we can adopt the Krugmanesque stance, not because it is a wash but because the promise holders will be screwed. That would be 40ish folks thinking they'll get SocSec benefits that they earned...oh wait, that's me!!!

Andy from Beaverton said...

'A Citizen's Guide to the 2011 Financial Report of the U.S. Government' is probably one of the most important documents you can read to easily understand the debt.
The $4.75 trillion dollar can't be paid down with budget surpluses. In order for that number to go down, the departments that feed surpluses to this account must run deficits. Once they run deficits, the general fund will cover it thus reducing the intragovernmental debt number.
On page 4 of the 2008 report you can read how a substantial reestimation of VA’s actuarial liabilities resulted in a $339 billion increase in VA’s estimated actuarial liabilities for veterans’ benefits. This resulted in unprecedented increase of Intragovernmental Debt.

If I paid the government a penny today, and every week I doubled the payment (1, 2, 4, 8, ect...), how many weeks would it take to pay off the entire $10.5 trillion public debt? Less than a year. It adds up fast!