Just How Large Is America's Public Debt?

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.

US states and local governments. US states and local governments have debts roughly equaling around 19% of GDP. However, states and local governments have completely separate accounts -- with their own revenue bases and assets to back their debts up. Furthermore, state and local governments can, and do, default and this doesn't affect the US’s credit rating.

To refer to the above sources of debt as being “off balance sheet” is a bit disingenuous. These debts are very clearly disclosed by the government. These liabilities are no secret nor are they hidden in any way. And due to their nature and magnitude, they aren't a major problem for the US economy.

US Public Debt From a Global Perspective

Debt held by the public is the standard by which public debt is measured around the world. Analysts that cite debt figures of 90% for the US and say that the figure is close to Greece’s figure of around 113% are comparing apples to oranges. The comparable figures are 60.3% versus 113%.

Comparable figures are 60.3% for the US versus and average EU figure of 80%+ and 200%+ for Japan.

While figures vary from country to country, on a comparative basis, the US generally looks even better compared to Europe, Japan, and other developed nations when factoring in the debt of state and local governments.

The US also looks quite good on a global comparative basis when analyzing the problem of unfunded retirement and health-care liabilities. Because the US has relatively favorable demographics, US problems in these areas are imminently solvable with the implementation of relatively minor adjustments. The unfavorable demographics of most other developed nations in Europe and Asia means that their retirement system and health-care system problems make US challenges seem tiny by comparison.

Another critical factor in the analysis of debt dynamics is understanding what portion of the debt is foreign-held and what portion is denominated in a foreign currency. This is critical to understand because virtually all sovereign debt crises around the world in the past 50 years have centered on problems related to repayment of foreign denominated debt.

Foreign governments hold roughly 30% of all US debt held by the public. Other foreign nationals hold another 16% of total US public debt. This level of foreign indebtedness is moderate by international standards.

Furthermore, the US has virtually no liabilities in foreign currencies. This basic fact distinguishes the US from most countries in the world. And it distinguishes the US from virtually any country that has experienced a sovereign debt crisis in the past 50 years. Because virtually all US debt is denominated in US dollars the risk of default is minimal.

Conclusion

The fact of the matter is that the current level of US public indebtedness is simply not a big deal. As I stated in How Likely Is the US to Default?, the US and the rest of the world have got a great many things to worry very intensely about. US public debt is not one of them.

This isn't to say that I “like” US public debt, nor that I advocate deficits and/or debt. Quite to the contrary. I favor long-term fiscal balance (with scope for contra-cyclical fiscal policy) and I believe in the bedrock principle of a nation maintaining zero long-term public debt.

However, when discussing problems, I simply like to deal with facts and cold hard realities; not promulgate urban legends and dramatic fantasies.

I know that this will sound like sacrilege to folks that have been brainwashed into believing that the US’s public debt problems are completely out of control, untenable, and unmanageable.

But facts are facts. Unfortunately, facts don’t sell. Drama sells.