Deficit Spending

Lately we have gotten notification from both the CBO and independent economists that America's fiscal lack of responsibility will saddle the country with trillions in future deficits, roughly around $10 trillion in 10 years. Yet this is only half the story. Contrary to expectations that every dollar in deficit spending is funded with a dollar of debt, historical data indicates that actual debt-funded spending vastly exceeds monthly deficits. In fact, since the beginning of Fiscal 2007 (October 2006), the total cumulative deficit is $3 trillion. It may come as a surprise to some that over the same period, total US debt has increased not by $3 trillion (which would make intuitive sense), but nearly 50% more, by $4.4 trillion, meaning that the US Treasury has accumulated approximately $34 billion of debt in excess of any given month's average deficit. This means that should this trend persist, the $10 trillion in deficits over the next 10 years, will translate into roughly $15 trillion in new debt. Adding this amount to today's existing total debt of $12.9 trillion means that by 2020, the US will be saddled with $28 trillion in debt, or roughly double today's GDP. As this is a 9% CAGR, it means that GDP will need to increase by about 7% annually just to stay at about 100% debt/GDP in 2020: a ludicrous assumption.A more realistic one, in which US GDP increases by 2.5% each year, leads to a 2020 Debt-To-GDP ratio of 151%. Welcome to the new normal.