Wednesday, November 5, 2008

Barack Obama inherits the oval office….plus a truckload of public debt!

Barack Obama from Bloomberg:
“Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime -- two wars, a planet in peril, the worst financial crisis in a century,'' he said. ``There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair.''
Barack Obama has avoided answering the ultimate question: How is he planning to pay for a new energy program, an overhaul of the health care system, new schools, new infrastructure, tax cuts to the middle class, and don’t forget the massive stimulus package that is almost certain to pass Congress. If it is by new Treasury debt-issuance, here is what he is up against.

Exhibit 1: National Debt is surging

The chart illustrates monthly U.S. national debt as a share of personal income spanning the years 1970 to 2008. In September, U.S. debt at 82% of income was the highest….ever. Since then, debt has grown by another $531 billion to $10.56 trillion on November 3, 2008 (election day) based on new issuances to pay for the $250 billion capital injection plan and the Treasury’s sterilization efforts for the Fed.

Gross public debt (national debt in the chart above) is a function of intragovernmental debt (borrowing between U.S. government agencies) and debt held by the public (could be China, the U.K., or domestic citizens). In some sense, gross public debt is somewhat meaningless if a large share of it is just intragovernmental debt. Therefore, net public debt = gross public debt – intragovernmental debt is the true measure of indebtedness.

Exhibit 2: Net public debt is surging

The chart illustrates monthly net public debt as a share of gross debt (and its 3-month moving average) spanning the years 2001 to 2008. In September, the share of net public debt grew to 58% and is expected to grow further (See Brad Sester’s piece on new debt issuance).

Over the years 2005-2007, one could have argued that the growth in gross debt was not a problem since most of the new issuance was between government agencies (intragovernmental). However, times have changed since the beginning of 2008. Now the U.S. Treasury issues a growing share of its debt to the public, implying that it is increasingly and truly on the hook for its debt payments.

We are borrowing more and more from global central banks (China, Russia, Korea, Japan) and from ourselves (American citizens). Brad Sester argues that the Treasury’s expected $500 billion in new fourth quarter issuance will be bought mostly by American citizens, rather than global central banks. However, it doesn’t matter who buys it as long as it goes to the public.

All we can hope for is a bit of fiscal responsibility after the U.S. economy emerges from this recession. The Treasury must pay down this huge accrual of debt; Barack Obama cannot have it all – many of his economic reform programs (health care, energy, schooling, unemployment insurance, union support, tax cuts to the middle class, new infrastructure) must be cut.

Rebecca Wilder


  1. There actually may be hope. If you check the promises in past elections, the reality told the winner that they could not be kept. Anyway, watch out all of us who pay taxes, especially if you have interest/dividends. Capital gains IS going to go up; income taxes WILL rise (except for the lowest bracket); and we all will be paying more to fund local and state governments. This, of course, will not pay for much but it will make everyone feel good!

  2. Janie you make a good point in the last sentence of your comment -- "will not pay for much but it will make everyone feel good!" Getting people to "feel good" is part of the solution. Now I know that's a surface solution, but it's a first step and a quick step in recovery. Citizen's reactions early on in Obama's term could dictate the future. No matter who you voted for, this "changing of the guard" may be our only chance to make things right again. Let's just hope it's done right, for everyone's sake.

  3. On Economics, I Expect Liberals To Be Disappointed

    Robert Peston lists some of President Obama's more liberal proposals on BBC, but wonders whether they will be put into practice given the current fiscal situation:

    "The point is that he is inheriting an economic estate that has been pillaged by his predecessor.

    US public sector debt is well over $10,000bn, equivalent to around 80% of US economic output (roughly double the share of GDP taken by our government's debt - though most economists would say that the Treasury significantly understates the British national debt).

    And the rising burden of bailing out America's battered banks and financial institutions means that US government debt is on a strong rising trend.

    That worries foreign investors who are supposed to buy all this debt in the form of US Treasuries.

    If these investors see no realistic prospect of Obama cutting public borrowing on any meaningful time horizon, that would put further downward pressure on the dollar against the currencies of China, Japan and the eurozone (though probably not against sterling, since the UK is perceived to have too many structural weaknesses in common with the US).

    Which perhaps would be no bad thing for US exporters. But it would be a problem if it led to a painful rise in the cost for Obama's administration of servicing all that debt.

    The US government, US banks, US consumers and US business all remains precariously dependent on borrowing from Asia and the Middle East.

    The urgent need for the US to become more financially self-sufficient, for its economy and the global economy to be better balanced, may conflict with Obama's determination to spend in order to make his country (in his view) a fairer society."

    I agree with his basic point, but not about making our country a fairer society. There are many things we can still do in this tough environment to help out on that score. However, I too doubt that many of these proposals will be enacted.

    Anyway, I predict that President Obama will, once again, please me more than many liberals on economics. On other issues, we're in general agreement, and might take the same hits.

    Don the libertarian Democrat

  4. It’s been an epic struggle, throughout both the Republican and the Democratic primary to the conclusion of the national election; Barack Obama's was a hard fought victory. The protracted presidential race was also a huge diversion from the very real problems, which stem from a myriad of past political and economic blunders. Lets hope President Obama will be bigger on solutions, than he is on rhetoric. I believe the girl & the Navy guy would have been by far and away the better choice.

    Mr. Obama inherits markets that will not rebound; they know the bailout does not address the fundamental reasons – rampant corruption, illegal immigration, and a dependence on foreign oil – that there is a problem. Simply put, the bailout is good money after bad. Demand accountability? Not our politicians:

    In the words of one Wall Street banker: We want to be free! We want to be free to do what we want to do. We want to be free to ride. We want to be free to ride our machines without being hassled by The Man! And we want to get loaded. And we want to have a good time. And that's what we’re going to do. We’re going to have a good time. We’re going to have a party. Seriously, that’s from the 1966 movie The Wild Angels. As good economic advice as any though. Hope it helps.


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