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.