The Really Scary Thing is the Debt Itself

I watch what people do – not what they say. The leading economists are forecasting slight economic growth next year with the first one or two quarters of 2009 with negative growth. Watching Treasury’s and the Fed’s reaction to this crisis, a different story is told.

Let’s Look at the Growing National Debt

Over $10 trillion and growing.

click to enlarge

However, charts like this are misleading because debt is a function of your ability to repay the debt. To understand America’s debt, we need to look at it as a function of earnings – in this case Gross Domestic Product [GDP].

A debt perspective, thanks to zfacts.com, relating debt to past presidential terms.

When has Explosive Debt Growth Occurred in the past?

2008 National Debt growth is on track to exceed 10%. There were only four other times since 1929 when this has happened – one time during the depression, and three times during WWII. All previous occasions have been during a national emergency. To take such drastic actions today should only be understood that we are in another national emergency.

We are in an Economic Emergency

The Government’s actions tell the story. They are pumping unprecedented liquidity into the financial system which should be causing massive economic expansion and inflation. They have taken on debt at historical levels when they know it will hinder recovery. They are desperately trying to mitigate the destruction this economic downturn is delivering.

There is an expanding economic crisis without historical parallel. It is the perfect storm of deleveraging, horrible business decisions taking on risk, world wide recession, and structural changes in the economic fabric. This is not 1929. This does not have the characteristics of other post WWII recessions. Whatever this is it is scaring the pants off of the Government.

Government Revenues will fall. This is obvious as economic expansion has stopped, and business earnings are showing a very noticeable decline. The states are already in trouble. According to a white paper released by the Center on Budget and Policy Priorities on 11/12/2008, at least 41 states are facing a budget shortfall:

It is very likely debt as a percentage of GDP will grow another 10% next year. The Debt will grow due to revenue shortfalls and costs of remedial actions (such as saving the automakers or assisting the states) to mitigate the social impact of this economic crisis. And there are costs associated with any Government economic stimulus programs. Oh, I forgot all the costs associated with campaign promises.

But the real scary thing is the overall debt itself. If the economy begins a recovery, it should quickly overheat due to the liquidity in the monetary system. The Fed will immediately lift interest rates to stop inflation. And one of the impacts will be an increase to the interest government pays to finance the debt.

The Real Debt We Finance

The Government has been commingling funds. Social Security and Medicare are making money for the government. So instead of needing to finance over $10 trillion dollars, the Government needs to finance only $6.4 trillion. But the growth of real financing for the government is startling.

In the last eight years, the Government actually has almost doubled the debt we must finance. The rates the government must pay to finance the debt is currently low. Within the next eight years, the surpluses from Social Security and Medicare will start falling. The Government will need to finance more, and a larger portion of the national budget will become fixed due to financing the debt.

Does the Government really have the financial resources to respond to this economic crisis? This is not going to turn out good.

Disclosures: None

Comments

[Kevin Walmsley:]

You can't borrow your way out of debt, and the US government will soon learn what investors in the major investment banks already have: that throwing good money after bad will only slightly postpone the inevitable, and run up the tab unnecessarily.

2008 Nov 23 11:06 AM

[tragicomix:]

Great. This passes off as economic analysis according to Mr. Hansen. The only thing it tells us that things have come to such a sorry, sorry pass that I am wasting time reading stuff such as this. Wasn't there a time that seekingalpha had some decent posts?

2008 Nov 23 11:27 AM

[Lea Cabrerra:]

One must ask the question: Had we never adopted central banking and its fractional reserves mechanism of alchemy, could we have avoided the malaise we face? Could any of this have ever been possible without a belief in defying the laws of financial physics?

There is no bigger oxymoron than to equate central banking with free markets. In short, they interrupt the equilibrium of interest rates that would otherwise be maintained by the competitive forces of free-markets and its inner relations between savers and borrowers.

Since 1982, the central bankers have undercut the savers by offering money to banks and borrowers at rates below what would otherwise have to be paid to the savers.

This has created massive misallocations of capital and the continual attempts at financial wizardry will only serve to make the matter worse.

2008 Nov 23 11:33 AM

[Moses:]

Can't really use the debt to GDP comparison as the way we calculate GDP has changed significantly over the years and today's number is total BS. Our GDP is actually much lower than what the government puts out.

2008 Nov 23 11:42 AM

[Lilguy:]

I won't quibble with the basic premise of this piece--that we have too much public debt--but one major shortcoming undermines the argument: You have failed to account for inflation in your historic record. While this is not necessary when looking at ratios (National Debt to GDP), it is crucial when looking at the real value of debt over time.

2008 Nov 23 11:49 AM

[raising4dau...:]

So what's the problem? $10T in debt can be paid back in 100 years if we only run a $100B surplus every year (tongue planted firmly in cheek).

2008 Nov 23 12:02 PM

[Steven Hansen:]

thank you for your comments so far.

i did analyze the debt with inflation (cpi). it did not change the graphs in any significant way, and added a level of confusion. it is always difficult to decide the level of complexity and detail you should introduce into a topic.

Actually, the point of this post was not to look at debt over time. i believe the only debt that counts is the public financed debt (now $6.4 trillion). it has had explosive growth over the last eight years. inflation is a small factor in this. and now think of the stimulus packages the government wants to implement. in recessions, government spending increases while revenue (taxes, ss payments, fica) decreases. this financed debt will be much larger than i estimated. there is no way to pay this back, it strangles any economic recovery, and it reduces available funds for government in the future.

the government will not be able to inflate their way out of this - because the have too much financed debt. as the sword of inflation has two edges. but this is the subject for another post.

today there are several other posts which i believe complement what i was trying to convey. they are worth reading:

seekingalpha.com/artic...

seekingalpha.com/artic...

seekingalpha.com/artic...

steven hansen

2008 Nov 24 01:30 AM

[iknoknot:]

an interesting article w/ six comments from posters I have never seen/noticed, five of whom "get it". refreshing.

With much concern, I believe you are all correct.

hold on tight, or perhaps, let it all go (but either way, please keep an eye on the US constitution. I fear there are those that would react to this mess in ways that might insure its demise).

--ikk

2008 Nov 24 01:33 AM

[xsuddensam:]

Scary is right. The last I read, the national debt is accruing interest at a rate of $32,000/sec; that's 84,600 seconds per day!

2008 Nov 24 09:00 AM

[WAKEUP:]

Bad, isn't it? It's always hell, when the chickens come home to roost. I said, a year or more ago, in these pages, that the compost was going to hit the air conditioner unless those mental midgets on Wall-Eyed Street were reined in. No one stopped them, and here we are, up the creek with a very slender paddle. It's amazing what a handful of greedy fools can do to even a great and powerful economy. In Southeast Asia, in the 1960's I saw some bankers and other financial types stood up in front of a wall, and shot dead, for doing what has been allowed to happen here.

2008 Nov 24 09:11 PM