Goldman's Essay On Why The US Debt Load Is "Not Too Concerning"

Tyler Durden's picture

Goldman has been on a roll this week. After losing all credibility (or whatever they had) with the markets, the objective media and Main Street, but not their clients, who were the ones losing the most for interacting with the squid, yet refuse to take their business elsewhere for fear of being locked out from the market monopolist with the greatest amount of inventory (yes, economies of scale when compounded with not so subtle forced liquidations of key competitors end up in monopolistic outcomes), now their economic team is taking a gamble with its own reputation (this is the team that won the best big bank economic team aware for 2009). In a note distributed to clients, entitled "What's the Right Measure of US Government Debt?" Andrew Tilton and Alec Phillips try to present the case that contrary to what you may have heard, the $12.8 trillion of US debt is not really worth losing sleep over. In fact the next time Goldman needs a bailout and the resultant $2-20 trillion of new debt are added to the make the 2s30s at about 100%, that should not be a source of concern either.

We present the "essay" in its entirety.

What's the Right Measure of US Government Debt?

Investors prone to worry about the sustainability of government debt may feel increased anxiety given the wide variation in estimates of government liabilities.  In today’s comment we list some of the major reasons why figures differ and organize them in a common framework.

When reviewing debt figures it is important to distinguish between a) federal and state/local debt, b) gross vs. net debt, c) present vs. future obligations, d) on- vs. off-balance sheet commitments, and e) stronger vs. weaker commitments.  For those focused on the federal government’s near-term financial condition, federal net debt of about 50% of GDP (including net GSE liabilities) may be an appropriate measure; for those wishing to compare government debt sustainability across countries, gross general government debt to GDP of 70% is probably a fairer comparison. Unfunded liabilities of 200%+ of GDP are extremely worrisome, but serve mainly to make plain that fiscal policy must and will change.

As many economies and markets recover from the worst of the financial crisis, investors have turned their attention to the creditworthiness of governments.  The fiscal support needed to contain the financial damage and kick-start growth has been considerable, and has naturally raised questions about the sustainability of government borrowing in many countries.

One source of anxiety for many investors has been skepticism regarding the commonly used government budget statistics, which exclude a variety of off-balance sheet liabilities.  This skepticism has in turn led to a plethora of estimates about the “true” amount of government debt, from federal debt held by the public (54% of GDP in 2009) to the present value of total government liabilities (several times GDP).  In today’s comment we list some of the major reasons why estimates differ, and organize them in a common framework.  Though still incomplete, the table below may serve to provide some context for the various estimates of debt. (Note that some figures are our estimates, and in cases where 2009 figures are unavailable, we have used 2008 data.)

A good deal of the confusion stems from the various forms of governmental obligations that exist.  We can distinguish among these in several ways:

1. Federal vs. state/local.  Although some analyses focus only on state and local obligations as a share of state GDP in evaluating municipal debt sustainability, or on federal debt/GDP in evaluating federal fiscal sustainability, it is more instructive to combine the federal, state, and local debt burdens as a share of GDP, given that the revenue used to pay interest on this debt ultimately comes from the same source – the income generated by the economy.  For example, while the current federal debt/GDP ratio is generally viewed as sustainable, it would appear less sustainable if there were other claims, such as taxes to fund state/local debt, on the same income.  A second justification for a combined “general government” approach is to net out claims between state and federal governments; states hold Treasury and GSE securities that comprise some of the gross federal debt in the table below, but net out once the balance sheets of governments at all levels are consolidated.

2. Gross vs. net debt.  This distinction used to be important mainly at the state/local level, where governments have in aggregate typically held financial assets roughly equal to and sometimes exceeding credit market liabilities.  At the federal level this distinction has been much less important, as the Treasury has typically held little by way of financial assets. However, recent financial market intervention has resulted in additional assets and liabilities coming onto the federal balance sheet, either officially or unofficially.  First, the Treasury financed its TARP program through debt issuance, but used nearly all of the proceeds to purchase financial assets with considerable value.  Second, the Treasury significantly strengthened the implicit federal guarantee of GSE liabilities when it put them into conservatorship in 2008, effectively increasing the amount of federally backed debt. However, the GSEs hold nearly an equivalent amount of assets.   Thus the net effect of financial stabilization programs on debt levels is considerably less significant than the change in gross debt would imply.  

3. Present vs. future obligations.  Any discussion of fiscal sustainability would be incomplete without a discussion of future obligations, particularly those related to retirement-related programs.  As shown in the table below, governments hold significant assets in pension funds (in the case of state/local) and intragovernmental trust funds (in the case of federal). These assets, along with revenue that continues to be collected through dedicated payroll taxes, are in most cases sufficient to pay current obligations related to these programs. However, these programs are far from balance over the long term; pension plans for retired government employees are underfunded by 33% of GDP according to estimates from the Pew Center on the States and the Government Accountability Office, and federal entitlement programs face an unfunded liability of at least 129% of GDP (based on 75-year deficits calculated by the Social Security and Medicare trustees) if current policy remains unchanged.

4. On vs. off-balance sheet.  Although on-balance sheet commitments should obviously be counted toward debt totals, off-balance sheet commitments can be more subjective.  First, there is no agreed-upon amount for many of these obligations, such as the pension or entitlement shortfall noted above. Second, it isn’t clear where to draw the line—for instance, most observers count some form of pension underfunding, and while many analysts left out GSE obligations before the entities were put into conservatorship, we suspect more are inclined to include them today.

5. Strong vs. weak commitments.  How off-balance sheet commitments are treated depends in large part on the degree to which governments are (or are perceived to be) bound to make good on certain obligations. For instance, there is little dispute that debt service holds the top spot in the priority of claims on governmental revenue, particularly at the federal level.  Pension obligations come only slightly below; there have been few episodes of state and local governments reneging on pension obligations, and in some states they hold as high if not a higher legal position than debt service.  On the other hand, entitlement programs represent a softer commitment. Medicare Part A, which is financed through dedicated payroll taxes placed in a trust fund, represents a fairly strong commitment to future retirees.  The rest of Medicare (Parts B and D), which bases eligibility on Medicare Part A but is financed out of general revenues and premiums from current enrollees, is more of a hybrid, with not quite as strong a commitment to leave benefits unchanged. Medicaid, by contrast, is financed entirely out of general revenues, and only a fraction of the taxpayers who pay for the program will use it.  



What’s the appropriate measure to use?  It depends on the purpose, but we would highlight three main ways of looking at the numbers:

1.  For assessing the federal government’s current financial position.  Here, we would focus on net on-balance sheet government debt, plus net debt related to GSE/financial sector commitments: these are the obligations that are likely to be relevant in the very near-term, less the liquid assets available to pay them.  This particular measure is not too concerning, at just under 50% of GDP in 2009.  Of course, the budget situation is deteriorating rapidly: we expect the current-year federal deficit to exceed 10% of GDP, and see deficits still in the mid-single-digit range through the end of the decade.

2.  Debt sustainability, especially for international comparisons.  At the international level, gross general government debt (70% of GDP in the US) is probably the most widely used measure.  This includes state and local obligations, some of which ultimately could be backed by the federal government in a crisis.  It does not net out assets, since the liquidity and quality of government assets is difficult to compare across countries.  Ideally, we’d like to compare net general government debt, including the likely cost of contingent liabilities, but in practice this is very difficult. 

While we’re on the subject, it’s worth pointing out that comparisons of the debt of certain US states with other sovereign nations are apples-to-oranges.  The economic situation of states is clearly affected by federal government policies and debt, and so at the least, one should apply a pro rata share of federal government debt if making any kind of international comparison.

3.  To gauge the magnitude of decisions facing policymakers.  Here, total net debt of all types, including unfunded entitlements, is probably the best measure—simply because it makes plain that the current combination of government tax and spending policies is unsustainable and will require tough decisions soon.  Higher taxes are likely to be part of the solution, but reform to entitlement spending also is inevitable.  For exactly this reason, we don’t think that debt/GDP figures of 200%+ are a good representation of the United States’ current position.  They are based on an assumption that policy doesn’t change, but we know it must.

Andrew Tilton / Alec Phillips


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BlackBeard's picture

Are they trying to break into the financial media industry?  If that's the case, they've got to try harder.  CNBC has a HUGE lead on the bullshit being served per programming hour.

SWRichmond's picture

Nah, they're sucking up to uncle.

ZackAttack's picture

Yep, a squid pro quo for all the 'help' over the years.

weinerdog43's picture

"squid pro quo"


+1000!  Excellent!

FEDbuster's picture

They are all just financial fluffers for the limp dick Uncle Sam.

Everyman's picture

Is any news media financial or otherwise going to start doing some damn investigative reporting???

Good lord the squids all collapse the economy by designing these CDS and MBS BS, and then ask for money, get it, give bounues and then tell us the bill to the taxpayers is...


"NOT TOO BAD"!!!!!!?????

In the immortal words of John Stewart:  "Are You Funcking Kidding me????"


"I am Joe's Raging Bile Duct."

"I am Joe's Grinding Teeth."


In the offbalance sheet portion:

"...and while many analysts left out GSE obligations before the entities were put into conservatorship, we suspect more are inclined to include them today."

GEE, since they are now TRILLIONS I would think they would need to be "included" in the balance sheets!!!  Are these guys for real, or just that damn dumb????

BrianOFlanagan's picture

what a giant pile of hot stinking dog doo. 

whatsinaname's picture

Will the giant pile of hot stinking dog doo smell any better when illegals (are forced to) leave the US ? Is the action in Arizona start of a trend and will it kick off massive inflationary pressures for the USA ? How will the bond market react then ? Will debt still not matter ?

docj's picture

The arsonist, surveying his handiwork, with smug approval.

chealy3's picture

Temptation’s page flies out the door
You follow, find yourself at war
Watch waterfalls of pity roar
You feel to moan but unlike before
You discover that you’d just be one more
Person crying

casino capitalism's picture

Self-serving @ssholes.

Everyman's picture

"...simply because it makes plain that the current combination of government tax and spending policies is unsustainable and will require tough decisions soon.  Higher taxes are likely to be part of the solution, but reform to entitlement spending also is inevitable.  For exactly this reason, we don’t think that debt/GDP figures of 200%+ are a good representation of the United States’ current position.  They are based on an assumption that policy doesn’t change, but we know it must."

Gee, I wonder if that includes all the claw backs from all the bailed out organizations, as well as sharing some of the profit with the taxpayers of the United States, since they footed the bill for GS's assinine risk.

How can these guys print this shit with a straight face???

All_Is_Well's picture

Because they know deep down inside that, it's all a sham, based in fantasy, and the money is worthless!

Fox Moulder's picture

Straight face? They are laughing all the way to ... well you know the rest.

Augustus's picture

Sure Goldie shares profits.  First it paid back the money with interest and profits on  the warrants.  Then it pays income taxes on its profits.  Then the goldie employees getting the bonuses keep NYC from collapse with their taxes.  As for you, they will give you a tip for that shoe shine.  Be happy.

snowball777's picture

We gonna chase dem crazy baldheads out of town...



tmftdoyle's picture

Government policy must and will change. that is exactly the point; these changes will be massively contractionary to the economy. 

tmftdoyle's picture

Government policy must and will change. that is exactly the point; these changes will be massively contractionary to the economy. 

SayTabserb's picture

Well, that's nice to know. I still can't follow, however, what is meant by the Social Security Trust Fund as an "asset" offsetting the future liability for old age pensions (actually, current deficit, since it's already running negative). The Trust Fund is simply a crime scene, is it not? The forensic, accounting record of money taxed and taken, spent on other general progams, and replaced with more debt. How can that be an offsetting "asset?" Also, what assumptions are they using about unemployment and growth? The USA is taking in about $2.2 trillion a year in gross taxes, spending about $3.5 trillion. What exactly is going to turn those numbers around? What assumptions are they using about future Treasury debt interest rates? And why did the GAO just publish a forecast that by 2020 (a little over 9 years from now), Social Security, Medicare, Medicaid and interest payments would, by themselves, take up 93% of federal spending? I don't see how this rosy forecast can be reconciled with that. Is this simply more Goldman fraud?

Tart's picture

This just in from Bloomberg "Stocks in U.S. Cheapest Since 1990 as Analysts Boost Estimates".......story to follow.........forget buying at 666 when it's much cheaper to buy at 1200

chealy3's picture

yes, and yawn again..

MsCreant's picture

Never mind if you can eat it or not, if we all bought PMs we could take this system down. If we could get enough people doing it, they couldn't pull this sleight of hand crap. It would be taking back our power that we gave to them when we let them take us off the gold standard.




chealy3's picture

how many people will it take?

Hansel's picture

I'm doing my best!  I even figure some people are half-assing it, so I bought their share too.  :)

chealy3's picture

it will take more than that

BrianOFlanagan's picture

Agreed, time to starve this freakin beast by pulling all our money out of this corrupt system. 

Mr Lennon Hendrix's picture

Die Fuckers!

Ill Bill feat. Immortal Technique- War is My Destiny:

Alienated Serf's picture

o/t- since you like hip-hop, check out uncommon valor by jedi mind tricks with RA the rugged man

Mr Lennon Hendrix's picture

Some of the best in the game right there.

Crab Cake's picture

"Although on-balance sheet commitments should obviously be counted toward debt totals, off-balance sheet commitments can be more subjective."

This coming from a corporatized investment bank?  Who'd of thunk it. 

I can only speak for myself, but I don't believe a damned word I hear coming from DC (from either corrupted party), Wall St, or the "main stream" media.  All I hear is blah blah blah, lies, and spin.  Full faith for their bullshit fiatsco credit empire?  Whoever is counting on that from me can go F themselves. I'd rather live in the woods in a tent, and die young, than have anything to do with any of these "interested parties."  The only reason I haven't gone guerilla is the good of my family, but rest assured that I will resist in any way possible until the day I stop breathing breath.

Ditch your mortgages if you can, toss your credit cards, don't do business with Wall St and/or invest, live a cash/barter life, don't do business with banks if at all possible and certainly not TBTF, and don't pay taxes through your paycheck (make the bastards wait, or don't pay at all).

I have had it with this hypocritical so called Republic.  We aren't citizens!  At best we are consumers, and at worst we are corpo debt slaves/livestock.  Fuck it all.  Fuck DC, Wall St, the ratings agencies, the political parties, the corporations, the military, the oil based economy, the War on Drugs, the media, the accountants, the lawyers, the ass backward education system, the nouveau aristocracy Bilderberger/CFR/TC, the Fed, the banks and bankers.... Fuck them all.

Even if this country manages to stay together long enough, I'm going off the grid, and will no longer be a participant.  Full faith my ass.  I'm done in any way I can be.  This is war.

chealy3's picture

stop venting, defeat the enemy from within

Crab Cake's picture

Oh, I assure you, I know fucking samsara too.  My participation dies with my ego first on the hit list.  I'm prepared to live in a cave with just the clothes on my back. I will let my rage pass through me into this world and leave not a stain, for it is not mine.  It is the balancing force of the universe, pure energy.  I'm not body, emotion, thought, time, my name, or action.  There is no control.  There is one escape, and only one.  Non attachment, and right living; the way and the life.

Emotion is not to meant to be contained.  Like all other appearance/reality, it is. The danger is in attachment to it.  I'm not entitled to anger, as the sea is not entitled to a storm; it just is.  The storm will pass, and calm seas return.  Neither calm nor the storm is right or wrong, they just are.  Freedom lies in attachment to neither.  This I understand, this I do my best to practice.  Liberation is not freedom from emotion, but rather the recognition of what it is, and letting it leave no stain upon one's being.  In this way balance and equanimity follows. 

Long live the forest, let it burn. 

Since I have addressed your statement.  Perhaps you will return the favor?  What is within, and what is without?  Hmmm?  Do you believe that to be clear?

chealy3's picture

recognition of what it is

Crab Cake's picture

Go fuck yourself, if there is a yourself to find.

chealy3's picture

no need for anger, wasted energy

weinerdog43's picture

"wasted energy"

like your post?


Crab Cake's picture

I love it.  Thanks for posting. 

"Freedom's just another word for nothing left to lose." - Janis Joplin

Most consider that a confession of desperation. A person has lost everything, and now has nothing; freedom.  Look again.  Empty your cup. 

Me and Bobbie McGee

Hulk's picture

nicely done crab cake, nicely done...

Nihilarian's picture

Nothing is more permanent than "temporary" arrangements -- patriot act, iraq/afghan wars, income tax, deficits...

chealy3's picture

at what point do we stop talking about things that already known?

snowball777's picture

When you stop whining and step up to the plate, chief.

Alienated Serf's picture

when do you stop answering questions with questions?  state your case or STFU

pan-the-ist's picture

Hey Socrates, we find your method to be vulgar and ugly.  Usually newbs who do this don't have the answers and want to appear wise.  Put up or shut up. (Which is to say, please write something with substance and add to the discussion.  You already have one foot in the grave here (that's a warning).)

Missing_Link's picture

Just when I thought Goldman could not possibly piss me off any more.