U.S. Government's Debt Problem

Although Treasury bond prices have come off the boil in recent days, yields remain substantially below where they were two months ago. Several factors have contributed to buoyancy in the sector, including aggressive safe haven buying and panic short-covering.

This won't be the case for long, however. Past spending excesses, trillions of dollars worth of government bailouts, and the prospect of one or more major stimulus packages have set the stage for a massive increase in federal government debt issuance in the months and years ahead that will more than offset existing demand.

Making matters worse, these are not the only factors that will upend the market for government-issued securities. Looming on the horizon are other, less well acknowledged obligations that make the expenditures noted above seem almost inconsequential.

In a commentary for the Federal Reserve Bank of St. Louis' Regional Economist, "Deficits, Debt and Looming Disaster: Reform of Entitlement Programs May Be the Only Hope," economist Michael Pakko details the nasty little supply-and-demand-imbalance-in-the-making that lies straight ahead.

For the fiscal year 2008, the federal government’s deficit totaled $455 billion, the largest ever for a single year. In the final days of the fiscal year, which ended Sept. 30, the total federal debt rose above $10 trillion for the first time. Forecasts for 2009 anticipate an even larger deficit.[1] As a new president and Congress take office, government deficits and the public debt will undoubtedly be a factor in economic policy discussions, especially in light of ongoing financial uncertainty and economic weakness.

From an economic perspective, the size of the deficit and debt per se are not necessarily as important as the underlying policies of spending and taxation. By their very nature, deficits reflect an imbalance between expenditures and receipts. Such imbalances need not be a concern and might, in fact, be desirable under some circumstances. And while rising government debt is often associated with direct economic costs, including higher interest rates and lower rates of private investment, evidence on the significance of these effects is mixed.

Nevertheless, when deficits are part of a fundamental structural imbalance in the long term, they signal a need for serious attention and reform. In a long-run fiscal analysis of U.S. federal government programs, this is demonstrably the case.

To see the rest of the article, including the footnotes, references, and several eye-catching charts, click here.

Comments

[Kunst:]

The national debt was $1 trillion when Reagan took office. Of the $9 trillion increase since then, $1 trillion was during Clinton's 8 years. The other $8 trillion are courtesy of Reagan and the two Bushes. I remember when Republicans were the party of fiscal responsibility.

Jan 08 12:44 AM