Deficits Ain't Debt

Bruce Krasting's picture


Lots of talk about “deficits” of late. I’m not sure what a deficit really means. Consider the Clinton years. The economy was good, there were no wars or disasters, the deficits were small, there were a few years where there was a budget surplus. - Aaaah - The debt exploded during those "good" years. The cumulative deficit for the Clinton years was only $327Billion, but the debt rose by $1.56 Trillion (475% more debt than deficits).


The deficit is a component of the debt. But it is not the only driver of debt. The following chart is the difference between the reported deficit, and the increase in debt going back to 2000.




The cumulative deficits add up to $6.9T, while the increase in debt is $10.4T. Over the past dozen years, debt has exceeded deficits by $3.5T (50%).


I bring up the discrepancy between debt and deficits to make the point that they are quite different, and any “happy talk” about deficits improving over the next few years should be tempered by the facts about debt.


First an explanation for the $3.5T discrepancy between debt and deficits. The vast majority of the difference is attributable to the country’s Trust Funds (SS, FERS and MRF – private/federal/military retirement). In past years these Funds have had true cash surpluses. The Funds lent the surpluses back to the government, and Uncle Sam promptly spent the loot.


In Washington they have funny accounting system that allows them to create both an Asset (the Funds) and a Liability (Treasury). On a “Unified” basis, the asset and liability net out, and therefore it is magically not reflected in the budget deficit. There are two sets of books, one is flawed accounting, the other is the real debt.


Within the definition of debt is the Debt Owed To the Public (DTP), and the Intergovernmental Debt (IG) (owed to the Trust Funds). Follows is a chart of the two categories of debt. Note that DTP has been exploding while the IG debt has stabilized.




The future of the Trust Funds is absolutely clear. They are in permanent decline. Every year they are forced to redeem a portion of their “savings” to meet current requirements to pay benefits. The cash drain will be approximately $70b in 2013. This will force Treasury to borrow an additional $70B ABOVE and BEYOND what the deficit will be. Every year the TFs will be forced to redeem more and more bonds, and every dollar must result in an increase in the DTP. Over the next few decades the TF will force an increase in the DTP of at least $5T. Five years from now the TFs will be pushing up DTP by $200b a year. After ten-years, the numbers go ballistic.


Again – this increase in DTP will be in addition to the annual deficits the country has now programed in. And again – none of this will ever appear on what is know as the budget.


The budget debate is bullshit, what matters is the Debt to the Public, and no one is looking at that – for now.




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Baldrick's picture

Bruce your views of the ss fund are too funny. I explained how the fund works to my 17 yo son and he said "so it's like the briefcase in Dumb and Dumber." If my son gets it, why don't you?

kaiserhoff's picture

Not a "funny accounting system."  Deliberate fraud.

TahoeBilly2012's picture

So it's twice as bad than just the "mentioned" deficit when you look at entitlements...okay so now let's add in dollar collapse in global purchasing power to the's at least four times as bad, which means collapse.

steve from virginia's picture




During the time period of Clinton's 'surplus' from 1996 to the first year of Bush's term the Federal Debt grew by US$ 583 billion.


Only during the entirety of Clinton's term from 1992 until 2000 was the US debt + $1 trillion. During the first four years of Clinton's term there were the same budget excesses of presidents Reagan and Bush with both GOP and Democrats in Congress adding to the debt. Large components of the debt before 1996 were military/nuclear weapons spending plus subsidies for the auto industry including multi-hundred billion dollar tax exemptions for real estate and direct subsidies for oil and gas business, highway construction plus subsidies for finance. Another component was military retirement payments for Vietnam- and Cold-War era personnel, almost 2 million of them.


After 2000 the increase in Federal debt was due almost entirely to Bush tax cuts for hedge fund managers, bond traders and similar capitalist roaders.


Social Security took in more than it expanded up until 2 years ago, you wrote about it yourself.


If yr gonna bash Clinton please do it for something he did wrong, like marrying that unspeakable harridan.



Go Tribe's picture

OK, let's not get political with this. Let's just disregard the handoff to the the motherfucker who took over in 2009.

ebworthen's picture

Let me make this simple:

Revolution and collapse.

We are no different than France in the mid 1700's.

Replace the Lords and Ladies, the King and Queen, with CONgress, the Judiciary, and the President and First Lady.

Let them all lose their heads, and especially the "finance ministers" on Wall Street.

The sooner the better, THE SOONER THE BETTER!

blindman's picture

deficits are debt and debt is money and legal tender
according to the federal reserve/usa treasury money
fraud system, good luck with that public-private
monopoly over human activity and value. aka-doomed
by structural design! murder, violence and fraud
sanctioned along with mind control and destruction as
a way of life and high art in the new digital age and virtual
entertainment, marketing and political arenas.
did i say doomed paradigm?

Accounting101's picture

Absolute bullshit alright! The author keeps trying to get us to believe that the SS Trust Fund is some amazing accounting procedure that is unprecedented. The treasury notes in the SS Trust Fund that will be redeemed are not all that different than any other treasury note. Those notes are redeemed every god damn day without any fanfare.

This guy is just trying to separate you from your money.

Yancey Ward's picture

The simplest way to view the trust funds is that their totals are debts that will have to be sold outside the governmental agencies in the future plus all their accumulated interest.

hooligan2009's picture

and hence should be invested away from the source of risk in individual peoples accounts, rather than by a ponzi government scheme

Sun and Moon's picture

This will force Treasury to borrow an additional $70B ABOVE and BEYOND what the deficit will be.

Although $70B is no small sum, it is dwarfed by the trillion dollar deficits that Obama is currently running. I think that Bruce is a closet Obama supporter and he runs these anti-SS diatribes in order to deflect attention from the larger problems that are due to Obama's spending policies. Yes, SS spending is a problem, but it is only a small part of the problem.

ebworthen's picture


Tax me for over 30 years then revoke your promise and talk about austerity and you can go to HELL.

Fuck the banks and insurers and corporations and CONgress and for good measure Hillary Fucking Clinton (lying sack of shit).  Fake tears and pulling the Woman's emotion ploy to avoid answering questions, so typical.  Can't believe someone didn't take out one or both of the Clintons.

What a crock of steaming manure all of this is.

Don't say a word about austerity and limiting already taxed entitlements when the Oligarchs have been bailed out and bonused for stealing.

See you on the battlefield!!!

Hope you packed your lunch!!!

NEOSERF's picture

Can imagine some day in the future where all this wonderful twitter technology creates flashmobs for real...Instead of million man marches there will be a simple Matrix like rebellion where one tax year millions are told this is the year to not pay taxes, there wouldn't be enough staff or prisons to hold them...and the split between the government and the "citizenry" will be begin.

hooligan2009's picture

now that IS the representatives, just choices beyond mandatory spending on benefits!

technology to do this is available now...there does not need to be a vote by the 435 + 100 + 1..we can vote ourselves (if we give a shit).

anything not voted on progresses no further.

the savings are endless

snowman's picture

Thanks Bruce.

Deficits or surpluses are cash flows on the income statement.

Debt is balance sheet. Two very different things.

Obviously the more debt you have the greater the risk of potentially creating negative cash flow, but it won't necessarily be so.

Furthermore, the debt discussion needs to include to entire picture, private and public. The "deficit" issue is simply a giant headfake by CONgress, media etc to not pay attention to a broken balance sheet.

Hook Line and Sphincter's picture

Keep in mind that Clinton deficit was an accounting Clinton-Copperfield act... his hand went into the trust fund cookie jar and displayed his tasty treats onto the deficit offset platter.

PD Quig's picture

Been telling my lefty friends this for years: Clinton and the GOP conspired in the so-called 'unitary budget' that allowed them to offset actual deficits with what was at that time surplus Social Security cash flow. They keep nattering on about Clinton's surpluses, but cannot wrap their innumerate noggins around the fact that the official DEBT grew every year of Clinton's terms except for 2000--when there was a $110B reduction.

Anybody who does not know the difference between a cash flow statement and balance sheet should not be allowed to vote.

Zenseless's picture

"Anybody who does not know the difference between a cash flow statement and balance sheet should not be allowed to vote."

They may not bother to vote, but they most certainly run our banking system and government.


Accounting101's picture

Stop the tribal bullshit! There are no lefty friends, or righty for that matter. Its us and the bankers with their political toads. When are we going to be honest about debt and deficits? Debt is always someone else's asset. When the federal government runs a deficit it conversely is creating assets somewhere else. An equal and opposite reaction. Basic economics.

slightlyskeptical's picture

We need governments to issue currency straight out while at the same time decreasing the leverage in fractional reserve lending.  The two will balance out and keep inflation in check and over time non-existant. Going forward balance government spending and taxes with productivity and we can have an effective, stable system.

As an economy we need more and more money as time goes on. We need to build retirement savings along with a slowly increasing of level of consumption. If ever dollar lent into circulation actually shrinks the available pot, then it becomes a mathematical impossibility to meet the needs of everyone in society, much less the wants.

it won't be until we change paradigms on money creation that we will see an economy based purely on supply and demand and standards of living based solely on ones contribution to society.


ebworthen's picture

slightlyskeptical said:

"Going forward balance government spending and taxes with productivity and we can have an effective, stable system."

Too late.

Let loose the dogs of war, and of revolution.

We are so far past a political and/or economic solution, so far.

Orly's picture

Sorry but that's not going to work.  If you wanted to open the door to neo-Keynesian methods, that would be the way to do it.

The expansion of money (credit...) should be tied directly to economic activity, such that a (properly measured...) GDP would yield a benchmark for reserve requirements in the fractional reserve system.  Only real things count, so there is nothing added for making loans, for instance, or selling derivatives.  Only real growth gets counted to determine how much money is going to be lent out.  The service sector can be counted, as long as there is some actual service transpires between someone and a person who pays for it.  In other words, clicks on Google do not go toward GDP.

In this way, the monetary expansion of credit can be titrated to the real economy and not to the shadow economy, as it is now.  Under this system, $67 Trillion worth of derivatives is an absloute impossiblity, mainly because they don't pay anything and if they did, they would be incredibly expensive.

Banks will be making loans to real small businesses under this scenario and not rehypothecating CDS-cubed to sell to the Chinese.



Jadr's picture

What entity creates the money in your system and how is it disbursed to those creating growth? What entity determines what real growth has occurred?

Orly's picture

As it should be here.  Congress has the pursestrings and the Executive Branch does the counting.

Don't start with, "it can be gamed."  You don't say.  But in order to have the most efficient government, honesty is the best policy.


Jadr's picture

Could you elaborate a little more on how this system would operate?

The monetary system is under the control of the government but you apparently would still allow for fractional reserve banking?

Can you explain how money creation would actually work in this system?

Orly's picture


  • Banks are given a charter under the State Constitution to become a lending institution.
  • Banks are not allowed to be investment houses, insurance brokers or hold actual real assets.  There are special rules for mortgages and repossession that basically revert to State authority.
  • There is a National Production Score developed by the US Department of the Treasury, which then scales the Reserve Ratio Requirements (RRR) and determines the bank's fractional reserve on a Quarterly basis.  The scale may be divided into regions, States or done on a National average basis.
  • Therefore, "money creation" or the velocity of credit, is directly tied to the regional output and is kept in line with the RRR native to that area.  This would, in theory, side-step the creation of credit that is used to draw credit forward from the future as the velocity of money could expand and contract according to local needs but would not be allowed to back derviatives such as CDS or MBS.

The problems that we have run into in our long financial history on the planet is the rapid expansion of unbridled credit.  Under this system, credit is allowed to "breathe" and booms and busts are controlled naturally and locally, as opposed to growing way out of proportion on an international basis.  There have been no checks and balances, only insipid greed.

What we have failed to do, in most instances, is to rein in credit creation when things start to inflate too quickly.  Instead, there has been a keep-up-with-the-Joneses mentality in that if France has a 50:1 RRR, then, by God, Britain is going to have a 60:1 RRR.

Clearly, this is unstainable and the expansion of credit needs to be tied to something organic, like domestic growth.  Sorry, Jamie Dimon won't get rich quick enough and the bank will require you to have twenty percent down because each of their loans is limited and precious. But something tells me we could live a lot easier with the consequences of this method.


H E D G E H O G's picture

exhume glass-steagall. bury the big banks.

DR's picture

The debt will contine to be rolled over and interest payed with printed money. This will go on until it doesn't-when it stops is anyone's guess.  Remember when $1.56 Trillion was a scary number?

Clesthenes's picture

May I suggest that it is time to examine the practical and constitutional perspectives regarding the redemption of governmental debt?

This kind of debt is the process by which a generation of tax consumers financially cannibalizes following generations of tax payers.  It is not the practice of civilized men, to state it gently.

Furthermore, to redeem such debt is impossible, both practically and constitutionally.

If such debt is to be redeemed, it must be finished before power passes from the hands of the generation that incurred it; for, following generations will not cannibalize themselves for the sake of a dead generation that used its children so badly.

Then, there are constitutional troubles: it is a constitutional principle that those taxed must also receive benefits of the tax.  A tax, for example, cannot be imposed in one county to build a road in another county.  A tax cannot be imposed on a generation of taxpayers for benefits enjoyed by a previous generation.

Also, consent is necessary before a tax can be constitutional; when government debt is incurred, it creates the necessity of imposing taxes in the future to redeem the debt.  If anything about the imposition of the tax is unconstitutional, the debt is also unlawful.  Here, the constitutional rule requires that following generations (children and those yet-to-be-born) give their consent when the debt is incurred – a constitutional and practical impossibility.

Another perspective, if proceeds of government debt were used to enrich a privileged few, a tax cannot be imposed to pay such debt; for it is not constitutional to use the power of government to enrich one man, or group of men, by taking property from another man, or group.

hooligan2009's picture

the generational repayment isssue you raise is interesting. link it to the electoral cycle and synch elections for the 435, the 100 and the 1? hmmm

i like that. leaves generational fiscal policy in tatters tho.

also, as part of the transition to the new system, would you declare past debt as "odious"?

Bullwinkle Moose's picture

What really matters above all else is the debt to GDP ratio. This ratio is very high and growing every day with no end to the growth in sight. When the current artificially low interest rates come back into line with basic economic reality, the federal government will not be able to pay the interest on the debt let alone the principal. Like I've heard before: Hope in one hand and shit in the other, and we'll see which one fills up first.

hooligan2009's picture

i think it goes a little deeper than a simple debt to gdp ratio for the simple reason that government spending is a large part of gdp.

strip this component out and then look at gdp, that is, GDP ex Government and voila..there is the real economy. well if you believe that the private sector is productive and the government sector is non-productive.

otto skorzeny's picture

the whole fucking GDP and GDP formula is a scam that can be/is manipulated to drive the markets higher(although what doesn't these days?)

hooligan2009's picture all we need is another simple accounting identity that doesnt treat a (loss making or deficit creating) sale or benefit as "output" and provides a more meaningful clue as to stock market value.

i was brought up with the fact that 50% of S&P earnings were sourced outside the US. i do not know what that figure is now.

coming up with a GDP measure that excludes the government sector would be more useful for the stock market. perhaps we are in the world where the riskiness of government debt means that government debt is its own stock market that is simply waiting for Chapter 11 and a restructured balance sheet that includes equity, or benefits and treasury debt linked to affordability.

i am thinking that there is a level at which the economy cannot be taxed further and that there is a threshold in cost of debt servicing a sa proportion of taxes.  

when interest takes more than is required to defend a country, the country is "invaded" by its creditors. 

at the moment, the US gathers in around 2.4 trillion. low interest rates mean that debt is being rolled over and into 1.5% government debt interest. However, the market value of debt for older high coupon issues is not even used in the calculation of debt outstanding, so the premise of debt is not market value driven, but "book entry" drive. I am guessing that the average coupon of the 16.4 trillion of debt is higher at c. 3% or around half a trillion bucks.

that means that more than 20% of taxes goes on interest. 

i would hazard a guess that in just five years, at current rates of deficits and increases in debt, interest will take one half of taxes.

i think that this is the break point, social infrastructure and institutions will break down.

otto skorzeny's picture

so-when do I stop paying income and real estate taxes?

hooligan2009's picture

soon as you either 


b) run for office

c) stop earning income and transfer your real estate to the "charity for cats"housed in your ranch!

d) become a bank


ChanceIs's picture

The budget debate is bullshit, what matters is the Debt to the Public, and no one is looking at that – for now.

Oh no, no, no.  Lots of people are looking at it.  Start with Ken Rogoff and Carmen Reinhardt.  They say that when the Debt/GDP ratio its 100%, the shooting match is over.  It was over more than a year ago.  Where are we now - 103%?  But hey, Geithner said the economy was recovering.  R&R say you never recover.  Either waste away on the vine or default.

I am looking at it.  That is why I have been shorting Treasuries - and getting toasted, and buying gold and silver.  Of course doing both simultaneously is madness because it is the same trade.  They are both seriously manipulated.  I surely wasn't counting on LiborGate.  Look for Lanny Bruer to be prosecuting that sometime in Obama's third term.

I think that Congress understands it.  They just can't deal with the reality that the money printing punchbowl won't work anymore.  I saw some classical psychological tests the other day.  Four people are put in a room with a fifth who doesn't understand the setup.  When queried, four of the five will say 2+2=5.  The fifth says no, it equals four.  When queried, four of five say that 10+11=12.  The fifth says no, its 11.  The next time, four of five say 13+14 =18.  At this point the fifth guy say 18 as well.  So it is with Congress and debt/deficits.  As long as say 30% are truly delusional, the other 70% will go along because they want to believe.  Hey!!!  "Deficits don't matter."  US Vice President Dick Cheney.


NotApplicable's picture

Your two trades are not the same, BTW. Your PM purchases will survive any reset, while any gains made shorting ZIRP dissapear upon said reset. And until a reset happens, ZIRP will continue to burn you, all while feeding the fires of the Fed in their effort against you.

Dollars are not ounces, and should not be counted as such.

kaiten's picture

Right on, Bruce. Im saying this for years, the real deficit is debt increase not what the clowns in Washington tell us.

hooligan2009's picture

there you go...good points Bruce...the government is owned by the public and vice versa...any information the government has also belongs to the public and any government official who says otherwise is deliberately "dumbing down" the public.

all government debt is public debt, it belongs to the people who have voted for this, directly and indirectly, for 50 years. 

who is the intra-government debt owed to? 

just wait til we here more stories about how "internalized" the Japanese Government debt is, as that is the way the US is heading. The Japanese are masters of obfuscation and have been for decades with cross shareholdings. Its government forces its public debt back on its citizens (via the Post Office), in the end, the whole debt belongs to the public, aka the people, aka the voters.

(for latin lovers: "beneficium accipere libertatem est vendere")

John_Coltrane's picture

Yes, Bruce's points are quite clear and can best be summarized by "there's no free lunch".  You either work, are productive and reduce the entropy of your universe, or you're a parasite (examples, lawyers and bankers).  All the accounting tricks in the world don't help once a country in aggregate decides to take it easy using "other people's money".  Its the accelerated decline of the West and we all know it. 

falak pema's picture

aren't we confusing levels and flows?

Debt is level of money owed.

If we talk at nation state level :

Deficit is net annual flow; new debt generated to the country, as netted sum of trade and financial interest/ curency exchange etc. flows.

So cumulative debt at any point in time is the sum of past national net deficits aggregated. Am I missing something?

lunaticfringe's picture

Right.Was there some disagreement with that premise somewhere?

idea_hamster's picture

Am I missing something?

I think the point of Bruce's post was that the sum of historical flows does NOT add up to the current debt -- the debt is much larger.  So when politicians discuss "cutting the deficit," that doesn't mean that debt won't continue to explode.

falak pema's picture

what is the source of this "mysterious hidden" deficit component that has created this debt? 

I am missing something! 

chart_gazer's picture

"The vast majority of the difference is attributable to the country’s Trust Funds (SS, FERS and MRF – private/federal/military retirement)."

these trust funds hold IOU's from the gov to the tune of $5T+ . When their pay outs exceed $ they are receiving from taxation they take their IOU's to the gov and say "give me $ for these, i need it to make my payments". since the gov has no extra $ (they are already deficit spending), they must issue additional debt to get $ to give to the trust funds. this additional debt is not included in the fiscal deficit that is discussed ad nauseum.


Orly's picture

I believe he said it was ballooning pension obligations for governmet and military employees.

Winston Churchill's picture

$300bn pa of something.

What is it ?

Black budgets maybe ?

otto skorzeny's picture

that's what the CIA/DEA's poppy fields in Afghanistan are for