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Just How Large Is America's Public Debt?


The answer may shock you.

Drama sells. And when it comes to the merchants of doom who make a living off of selling alarmist tales about the American apocalypse, the bigger the number cited for the US public debt, the better.

How else can you sell the idea of a "debt bomb" to scare people into participating in schemes to "invest" in gold (GLD), gold stocks (GDX), or some other commodities or to participate in some machination to short the US Dollar (UUP)?

I recently wrote a fairly detailed article on the US's overall debt dynamics entitled How Big a Deal Is America's Debt Problem? I've decided to follow the article up with one that focuses entirely on the issue of US public debt given that this is an area in which there's a great deal of misinformation circulating.

Facts About US Public Debt

It's common these days for analysts to cite figures for US public debt at around 80% to 95% of GDP. Some analysts cite even larger figures. I've even seen some writers cite US public debt figures at 60 trillion to 80 trillion dollars. All of this is misinformation.

I'd like to cite a few facts, just for the record.

1. According to the non-partisan Congressional Budget Office, US debt held by the public (public debt) was $7.54 trillion at the end of fiscal year 2009 and is projected to be $8.80 trillion by the end of fiscal year 2010.

2. Just in case you're curious, according to the US Treasury, as of February 22, 2010, US debt held by the public was precisely $7,893,549,784,639.46

3. According to the Congressional Budget Office, US public debt was the equivalent of 53.0% of GDP for fiscal year 2009 and is projected to reach 60.3% of GDP in fiscal year 2010.

The US is currently paying a blended average interest rate of around 3.5% on the totality of US public debt held by the public -- note that this excludes interest payments on intergovernmental debt (see iShares Barclays 20+ Year Treas Bond (TLT) for long-term yields and iShares Barclays Short Treasury Bond (SHV) for short-term yields on US debt). On this basis, interest payments (not total debt service, which includes payment of principal) as a percent of GDP are equivalent to about 1.4% of GDP. Let me repeat: US government interest payments are only equivalent to roughly 1.4% of national income.

Furthermore, if we factor in long-term inflation of about 2.5%, the US is essentially paying a real interest rate of about 1.00% on its debt. This translates into a real interest burden of about 0.4% of real GDP. This is almost an insignificant figure.

How About the Debt "Off the Balance Sheet"?

The merchants of doom and gloom are fond of talking about "off balance sheet debt." They will often use estimates of these debts to inflate the total public debt figure.

Intergovernmental debt.
This is one trick some analysts use to get the US public debt/GDP ratio up to 90%+. As of February 22, 2010, intergovernmental debt was $4.51 trillion. This is debt that various government agencies owe each other. It's clearly nonsense to include debt that the federal government owes itself as part of the total public debt.

Unfunded liabilities.
Many analysts love to cite the unfunded liabilities of the US Social Security system as well as the projected deficits of the Medicare/Medicaid systems as part of the public debt (this figure partially enters into the intergovernmental debt cited above). However, this is incorrect. These are merely theoretical contingencies according to current actuarial projections. The US isn't paying interest on these obligations. Furthermore, if the Social Security system and the health-care systems are reformed, which they almost certainly will be sooner or later, most of these contingent liabilities will probably disappear.

GSE liabilities. Some analysts like to "tack on" Fannie Mae (FNM) and Freddy Mac (FRE) debt to total public debt. This is quite absurd. Even in a worst-case scenario in which all GSE capital is wiped out in a bankruptcy and their assets and liabilities are taken over by the government, the mismatch between the value of the assets and liabilities of the GSEs would only be a small fraction of their total assets.
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