A Treasury Department report to Congress last week stated that total U.S. debt will climb to $19.6 trillion by 2015, as opposed to the 2019 date previously estimated. Treasury also estimated that total U.S. debt will top 13.6 trillion this year and would rise to 102% of GDP by 2015 as well. And most astonishingly, the report projected that the publicly traded debt (debt excluding intragovernmental obligations) would rise to $14 trillion by 2015, up from last year’s debt of “just” $7.5 trillion.
The official government report was promulgated with the same enthusiasm and fanfare as a grade school child announcing to his parents he has received his first “F”.
Perhaps most disappointing for U.S. taxpayers are some robust assumptions made in the report. For example, the report estimates that GDP will reach $19.1 trillion in 2015, which would cause the public debt to GDP ratio to only reach 73%. But just to achieve that undistinguished level, nominal GDP would have to grow at 5.52% each of those 5 years. Putting that growth into perspective, from Q1 2006 thru Q1 2007 nominal GDP grew at 4.6%. Between Q1 2007 and Q1 2008 GDP grew at 4.1%. Nominal GDP contracted in the recessionary time frame between Q1 2008 to Q1 2009. And from Q1 2009 thru Q1 2010 nominal GDP advanced by just 2.9%.
In order to get nominal GDP up from the previous year’s levels, government can seek to either grow real GDP or inflate nominal GDP. The problem is that growing GDP when debt levels are so high is extremely difficult. Precisely because high debt levels require onerous spending cuts to be implemented, this (in the short term) can directly lead to a contraction in the private sector of the economy and a decrease in total output. Delaying that fiscal responsibility only makes the eventual debt reconciliation much more difficult and is not a viable option.
Inflating your way out of the debt situation seems too often a tempting solution. However, inflation decreases economic growth and sends interest rates higher. The result is rising debt service along with decreased revenue from a faltering economy. That pathway doesn’t balance the books either.
The best solution would be to cut taxes in order to stimulate private sector growth and at the same time to reduce spending in order to bring down public sector obligations. However, the exact opposite method is currently being employed.
Backing up Treasury’s report to Congress was the release of the Federal Reserve’s Flow of Funds Report (Z.1) last week. Not surprising to this author was the increasing amount of debt the nation continues to accrue in Q1 2010.
The Federal Government added debt at an 18.5% annual rate, up from 12.6% during Q4 2009. Total non-financial debt increased at a 3.5% annual rate, up from 1.3% in the prior quarter. And total non-financial debt (national, state, local, business and household debt) breached above the $35 trillion mark for the first time in history. Therefore, we have succeeded as a country to not only achieve higher highs in nominal debt, but now have also managed to increase the rate of debt growth.
Unfortunately, the deleveraging and healing story cannot even begin to be discussed because we continue to pile debt upon debt as the proposed solution. Since our overleveraged economy was the cause of the great recession, how can we avoid going into a double-dip recession if leverage is still being added?
There can be no real long term solution other than a protracted period of increasing our savings as we increase our production. It will be a long, slow and painful process but one that is absolutely necessary to engender a healthy economy. If we continue to ignore the only real solution described above, the next downturn in the economy will be pernicious. What will our government do if a double-dip recession occurs in the near future? Redouble the Fed’s balance sheet again? Lower interest rates from the current 0-.25%? Or produce another doubling of government debt outstanding?
None of those choices appears to be either very appealing or productive. Given Treasury’s recent report on our debt projections, the time left to take the appropriate actions is running out.