On Debt Ceilings, Fiscal Cliffs, And Krugman's Deficit Debacle

Tyler Durden's picture

With all the buzz about the 'Fiscal Cliff' – that toxic combination of tax increases and spending cuts due to take hold in a few months – the subject of ongoing Federal budget deficits has fallen by the wayside.  ConvergEx's Nic Colas believes that’s a temporary phenomenon, for Congress will have to hammer out agreements to raise the debt ceiling right alongside its negotiations over the 'Cliff' items.  His back-of-the-envelope attempt to quantify how much a multi-year debt limit increase would run to take this burdensome legislative issue off the Congressional docket for 5, 10 or even 20 years is worrisome at best.  Using the most recent Office of Management and Budget’s numbers, we get to $3.4 trillion for the 5-year runway, but this assumes a high level of incremental taxation.  Against more modest expectations for government revenues (consistent with adjustments to forestall the 'Cliff'), the number could be as high as $4.5 trillion.  As for the longer time horizon debt runways, think in terms of an incremental $6.5-9.5 billion for a 10 and 20 year horizon. And without significant changes to taxes and/or spending, more.  Much more.

Nic Colas, ConvergEx: Jimmy Cliff, Paul Krugman, and the Federal Deficit - The Harder They Come...

This summer will mark the 40th anniversary of one of the great pop music movies of all time – the 1972 film The Harder They Come, starring Jamaican reggae artist Jimmy Cliff.  The movie came with a full-length album for a soundtrack, replete with songs that have become reggae classics in the intervening four decades.  It made Cliff an international star and ambassador of the genre, with songs like “Sitting in Limbo,” “You Can Get It if You Really Want It,” and the title track.  The album is regularly mentioned in music industry magazines “Top Albums of All Time” lists.   The success of The Harder They Come paved the way for other, now perhaps better known, acts like Bob Marley and Peter Tosh.

The year 1972 has another, less happy distinction, known only to students of U.S. economic history: it is a reasonable starting point for the modern trend of American government spending much more than it receives in receipts every single year.  The Vietnam War had been tough on the Federal Budget, as had other spending programs, and 1971 and 1972 saw back-to-back deficits of $23 billion apiece. That is about $126 billion today, adjusted for inflation.  Prior to this period, the only greater annual deficits had been in 1968 ($25 billion) and during World War II (an average of $43 billion annually from 1942-1945, or $570 billion today).

All the historical data is easy enough to find (click here and go to Table 1.1 http://www.whitehouse.gov/omb/budget/Historicals).  Here are a few further observations:

  • In the last 40 years, the U.S. Government has run a surplus just four times, from 1998 to 2001.  We quote government fiscal years here, by the way, which end in September.  This includes ‘On Budget’ items (Defense, Health Care, etc) and ‘Off Budget’ (Social Security, mostly).
  • The aggregate amount owed from these deficits is essentially the Federal Debt of the U.S., which currently stands at $15.7 trillion.
  • The average deficit over the last four years (which includes the 2012FY) is $1.3 trillion per year.  For the 20 years prior to this, the average deficit was $162 billion/year. That includes the effect of the 4 years of surplus.
  • While it may seem like ancient history, consider that during the period from 1945 to 1972 the U.S. ran a collective deficit of $123 billion, or just $677 billion in today’s dollars.  Of the 27 years in this run, there were Federal budget surpluses in 8 of them.

Fast forward to the present day, and these deficits have morphed from history lesson to political football.  The reason for this is the Federal Debt Ceiling, as we all learned in gory detail during last year’s Congressional debate on the topic.  The limit on Federal debt currently stands at $16.4 trillion.  We’ve included a handy table for the historically inclined reader on every past increase to the limit since 1940.  There are 79 increases on the list, ranging anywhere from less than 1% (1987 was the last time) to +25% (1990 for that case).  At the current pace of spending and receipts, the U.S. government will be out of debt capacity this calendar year, even if Treasury can massage outcome to push another debate into 2013.

Since the last debate was so fractious, I wondered what it would take to get an increase to Debt Limit that might last the country for 5, 10 or even 20 years.  Based on the OMB Budget (see that prior link for the exact numbers) as currently presented by the White House, here are some baseline numbers:

  • For 5 years: $3.4 trillion.  This is the simple total of the coming five years of expected deficits from the White House budget.  For reference, consider that over the last five years the debt ceiling has gone from $9.8 trillion to its current $16.4 trillion, an increase of $6.6 trillion.
  • For 10 years $6.5 trillion. The end point (2017FY) of the OMB budget shows an annual deficit of $612 billion.  Assuming that this is a constant figure and Congress is fine with a (relatively) small deficit like this, we multiplied it by 5 and added it to the $3.4 trillion explicitly modeled for the first five years.
  • For 20 years: $12.6 trillion.  Same assumptions here.  Ten more years at $612 billion, added to the first ten years.
  • A lot of money, yes, but remember that we’re talking future dollars here.  A dollar in the 2022, ten years hence, is presumably worth less than a dollar today if inflation is greater than zero.

Here’s the rub, however: the expectations in the OMB Budget as presented on its website are highly optimistic on tax and withholding receipts because they assume that the “Fiscal Cliff” of higher tax rates and lower spending kick in with full  force in 2013.  Just one number to make the point here: OMB’s deficit numbers assume that tax/withholding receipts increase from $2.5 trillion this year to $3.9 trillion in 2017.  Compounded growth rate: 9.3%, meaning no recession in the next five years and a pretty much straight shot higher for employment.

So what are the “Real numbers?”

The Congressional Budget Office just took a stab at those calculations in a recent report (http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-21-Long-T...).  Their “Alternative Fiscal Scenario” – essentially a realistic “Keep things as they are” projection – shows debt increasing by approximately double the current base, adjusted for inflation. That would put the 20 year debt limit amount at closer to $24 billion, assuming 2 percent inflation.

This is where the “Fiscal Cliff” debate that Congress must have before the end of 2012 dovetails with the debt ceiling debate, and I would argue that forcing lawmakers to vote on a 10-20 year horizon would actually help the process along.  The CBO and OMB have some decent models for what the world looks like under the current order of things, as well as under some pretty drastic changes.  If you just consider a one-off increase to the debt ceiling and some kick-the-can solutions to the Fiscal Cliff, you’ll never really address the whole picture.  That’s where Congress is heading, but it doesn’t have to be.

I also cannot help but think about Paul Krugman as I stare at these numbers.  His recent book, End this Depression Now, proposes that “A quick, strong recovery is just one step away, if our leaders can find the intellectual clarity and political will to end this depression now.”  This “One step” is deficit spending that is orders of magnitude greater than anything spent already.  Honestly, I have no idea if he really believes any of this, since it is politically impossible.  He’s a smart man, and he clearly knows this.  And he’s got a Nobel, yes, but so did the guys at Long Term Capital.  Still, I bet this modest proposal would meet with his approval, and maybe even Paul Ryan (R- WI), the fiscally conservative Congressman. Let’s have the whole debate, using the real long term numbers, and let the chips fall where they may.

And, lastly, the whole conversation of how the U.S, will square the circle of the debt ceiling/Fiscal Cliff debate brings me back to Jimmy Cliff and the track “Too Many Rivers to Cross” from The Harder They Come:

Many rivers to cross

But I can’t seem to find my way over.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
veyron's picture

Krugman has such a punchable face ...

TruthInSunshine's picture

If Keynes were alive today, he'd sue Krugman for libel & slander, and he'd file a petition for an injuntion, restraining Krugman from engaging in any future butchering and torturing of what Keynes believed and endorsed.


By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”


--John Maynard Keynes

from The Economic Consequences of the Peace (p. 235-6)

Dr. Engali's picture

Damn! That secret wasn't supposed to get out.!

AlaricBalth's picture

Dr. Krugman. Is it your learned opinion that an invasion of xenomorphic endoparasitoids from Omega Centauri is the most optimal mode of deliverance from our current economic quagmire?

NewThor's picture

Listening to Nobel Prize winning Dr. Paul Krugman talk about economics is almost the exact same thing as listening to Harold Camping talk about the Rapture.


Ropingdown's picture

Humor me:  It's the Riksbank Prize.  Alfred Nobel had nothing to do with it.  Let's stop encouraging economists pretending they are physicists. 

Pinto Currency's picture


It's a world-wide debt bubble collapse not a fiscal cliff.

Thank you central bankers.

Dr Benway's picture

This is the best Krugman picture though.




Drink yourselves sober, bitchez!

Poor Grogman's picture

Writing economic treatises while smashed is obviously the problem here folks...

johnQpublic's picture

author states 24 billion where it should be trillion for the long term defecits. thats 24 trillion on top of 17 trillion for 41 trillion....and even thats low because the numbers he is using add up to 26 trillion plus the projected 17 trillion at the end of this year.

so 20 years from now....43 trillion dollar national debt


and krugman wants to spend even more than that?


and just how much would we need to raise taxes to pay that off?

and over how many years?

tax rates would need to double just to stay even, much less pay the debt off

tax rates would need to triple to actually pay the debt off over a reasonable 30 year mortgage like time frame

so middle class tax rates at 105% of income

not to mention state tax,property tax,sales tax and all the 'stealth' taxes

figure what, about a total 125% tax rate for the middle class?

150% for rich folks


maybe a remedial math class should be provided as part of the nobel process?

mkkby's picture

Exactly Ropingdown.  A Nobel in a hard science is a major accomplishment.  A Nobel in economics might as well be in astrology or palm reading.  Like making lawn darts an olympic sport.

The Monkey's picture

Krugman is a relic. The only benefit he provides at this point is comic relief.

Element's picture

Close, but it's more like:

"Debt and war killing your economy?

More debt and more war will fix that!"

- Paul Special-K

barliman's picture


Wow!   What did Harold Camping (being a tele-evangelist means never having to say you're sorry) ever do to you to justify you comparing him to a sociopath like Krugman?



Zero Govt's picture

Krugman is Ben Bernankes poster-child

every bubble blower needs a hero

StormShadow's picture

Is it just me, or does Krugman remind you of that one ScoutMaster in Boy Scouts that nobody quite fully trusted. You know sorta a likable guy not too smart that everyone felt sorry for but also caused you to keep your flashlight and Buck knife at the ready in the night lest he decide to give you a visit from the Ether Bunny.

Seriously this man has totally lost it and truly needs professional medical help.

lolmao500's picture

Gee Keynes actually saying something that makes sense... has hell frozen over?

Ropingdown's picture

Keynes said many fine and true things.  But those weren't the parts that economists want to emphasize once they're on the payroll, some payroll.

ATM's picture

Keynes was a Socialist so perhaps the quote cited above was not so much a commentary but advice.

Stimulati's picture

Except that Keynesian theory and Krugman both predicted that the current environment wouldn't generate inflation, and it hasn't

TruthInSunshine's picture

Inflation Over The Last 12 Months (as of March 2, 2012)

Cotton is up 132 percent.

Agricultural raw materials up 39 percent.

Oil up 21 percent.

Coal up 36 percent.

Coffee up 70 percent.

Wheat up 62 percent.

Beef up 39 percent.

Fish up 31 percent.

Hard logs up 19 percent.

Soft logs up 27 percent.

Rubber up 79 percent.

Wool up 57 percent.

Fertilizer up 39 percent.

Soy beans up 42 percent.

Corn up 58 percent.

Industrial Inputs Price Index up 51 percent.

Commodity Food Price Index up 30 percent.

Commodity Fuel Price Index up 20 percent.

Stimulati's picture

The billion price index is up 2% YoY and trending down while retail gas is currently 14 cents below last year

TruthInSunshine's picture

So, it's "only" up 2% YoY, and now trending down (allegedly, and for how long is anyone's guess), but most major commodity prices are up by a factor of 20% to 1000% depending on the asset, over the past 4 years, and your claim that Krugman's prediction that inflation (let alone massive inflation) hasn't taken place isn't laughable?

You're the kind of person who apparently would tell someone that there's deflation in fuel prices, since unleaded gasoline is about $3.80/gallon now, as it has come down from just over $4 6 months ago, right?

Stimulati's picture

First, you shouldn't confuse commodity prices with consumer prices.  Second, gas is about $3.57 now.  Still too high, but lower than you say.  Third, global warming causing a low supply of wheat doesn't have much to do with monetary / fiscal policy does it?

TruthInSunshine's picture

Ahhhhhh, it's global warming's fault. Aha!

How about an absolute torrent of fiat that has been conjured from nothing and distributed to TBTF and quasi-TBTF entities which have been buying all tangible assets hand over fist (prompting non-TBTF entities to follow suit).

Stimulati's picture

That's just explaining the commodity price of wheat.   There is no fault here because inflation is well managed at 2%.

TruthInSunshine's picture

Where are you citing your "well managed inflation" rate of 2% spiel from?



March 2, 2012

What's the real rate of inflation?

Rick Moran

It won't surprise you that it is not the "official" rate of 3.1%.

CBS News:

Forget the modest 3.1 percent rise in the Consumer Price Index, the government's widely used measure of inflation. Everyday prices are up some 8 percent over the past year, according to the American Institute for Economic Research.

The not-for-profit research group measures inflation without looking at the big, one-time purchases that can skew the numbers. That means they don't look at the price of houses, furniture, appliances, cars, or computers. Instead, AIER focuses on Americans' typical daily purchases, such as food, gasoline, child care, prescription drugs, phone and television service, and other household products.

The institute contends that to get a good read on inflation's "sticker shock" effect, you must look at the cost of goods that the average household buys at least once a month and factor in only the kinds of expenses that are subject to change. That, too, eliminates the cost of housing because when you finance your home with a fixed-rate mortgage, that expense remains constant until you refinance or move.

The group maintains that this index better measures the real-world impact of price changes, particularly for people on a budget. And, largely as the result of the recent run-up in gas prices, this "everyday price index" (EPI) suggests that Americans are being pinched far more tightly than the official inflation measure would have you believe.

Over the past year, the EPI is up just over 8 percent, according to the economics group. The biggest factor: Motor fuel and transportation costs are up 21.06 percent from year-ago levels. The cost of food, prescription drugs, and tobacco also have increased faster than the government's inflation measure, rising 3.56 percent, 4.21 percent, and 3.4 percent, respectively.

The CPI "market basket" is rigged to show a lower rate of inflation. It has been this way for more than 20 years. With so many pensions, union raises, not to mention Social Security tied to the CPI, there is a significant lobby out there to keep the "official" rate of inflation as low as possible.

Is the rate coming out of Washington a total scam? Not really when one considers that the market basket gives less weight to items like food and fuel which tend to fluctuate wildly from month to month. For statistical purposes, that is probably ok.

But anyone who goes to the grocery store on a regular basis knows they're spending a lot more to feed their families and fill their car with gas than they were last year.

Stimulati's picture


I use the billion price index because people think the CPI is rigged

And one more thing - gas prices are lower than they were at this time last year.

Gazooks's picture


So what? To cite short term price volatility is meaningless, unless of course you're trading it. But macro trend consequences are quite something else as Garthwaite explains below. (And, where do you suppose gas will land when the Iranian wild card is played?) There's the set up 'now' for the shock of the 'then' amidst the interminable grind of the long term trend. That's the frequency that matters as a measure of inflation and its implications, the rest is merely tradable noise.

8 year chart of oil and gasoline prices: ch.gaschart

From Credit Suisse's Andrew Garthwaite:

The impact on GDP: each 10% rise in the oil price takes 0.2% off US GDP growth and 0.1% off global growth.This time the negative impact of a high oil price on growth is limited as: oil is only 10% above its 6-month MA (changes matter more than levels for growth); other energy prices are muted (coal prices are at 12-month lows, US gas prices down 40% yoy) and CPI food price inflation should fall by 5pp from here (adding 0.7% to disposable income); critically, unlike 2008 and 2011, neither the ECB nor GEM central banks are likely to raise rates in response to higher energy costs; and US macro momentum is currently consistent with GDP 0.8% above 2012 consensus, suggesting some buffer before consensus estimates get downgraded.


BigJim's picture

Even according to them (http://bpp.mit.edu/blog-2/) annual inflation is running at 3.74%, not 2%

Furthermore, are they weighting for household consumption, or including things like cars, rooms at the Ritz, yachts, airfares, mediteranean cruises? If we give yacht prices and Greek hotel rooms the same weighting as groceries, then, yes, I can well believe inflation is 'only' 3.74%.

John Williams' shadowstats is far more indicative of real inflation, particularly when comparing rates historically. It's all very well to say the billion prices project is only showing 2%, but what would it have shown prior to all the QE? We don't know, because it wasn't running back then; but for all we know it may have been showing an inflation rate of -8%, mightn't it?

Element's picture

I pine for the days when it was only $10.4 trillion ... what a time ... before Hank had to go into hiding.


On this day in 2016 - various US budget proposals extrapolated:


Freewheelin Franklin's picture

The only thing that seems to be keeping the inflation rate down, is the very low price of natgas, thanks to hydraulic fracturing. But after your comment about global warming, I'm sure you would like to put an end to that, or at least, put so many regulations on it, that compliance will cause drilling costs to increase, making it more difficult to maintain a profit at lower prices.

Freewheelin Franklin's picture

Third, global warming causing a low supply of wheat


"The 'weather' is the last resort of a scoudrel"


- Nouriel Roubini

Ropingdown's picture

If only I was in the market for a billion things....

barliman's picture


Pssst, don't tell him even the MIT authors have stated their index is not an appropriate means for judging inflation because it is too easily gamed.

He thinks he is on a roll.


Saro's picture

"Food* is up but yacht prices have been hit hard by the downturn, so in aggregate everything is equal!"


*Consuming under-cooked iPads puts you at risk for a food-borne virus.

Ayn NY's picture

They're trying to hide the double digit inflation in the housing crash. I like my iPad rare, btw.

Freewheelin Franklin's picture

Melissa Francis was talking about this last night witha small business owner, and how his costs have increased over the past 4 years. The result is smaller margins, and fewer customers (obviously).




God, I love Melissa.

JuicedGamma's picture

True, wages aren't inflating, it's a temporary side effect of the Chinese peasants being released onto the world manufacturing scene. Soon this will run it's course and the damage will become apparent in an unprecedented worldwide hyperinflationary death spiral conflageration.

Stimulati's picture

Yes, Smithers, yes.  Hyperinflation is just around the corner.  Has been for 3 years now.  Yes, yes.

TruthInSunshine's picture

Straw man, much?


You buy the official 2% tagline bullshit, while the real rate is close to 8%, and then you dare to tag someone, without cause, as claiming hyperinflation.

I have a little mathematical fact for you, which you're apparently ignorant enough not to understand; forget the 8% (even though it's closer to accurate than not), and let's split the difference between your 2% and my claim of 8%.

At an 5% average annual rate of inflation, one would need 50% more dollars to buy the same basket of goods in a decade than they do now.

Do you claim that wages are rising on the order of 5% per year at present (massive unemployment, underemployment levels, notwithstanding)?

If you concede inflation is 8%, do you claim that the average American's wages will rise to the level allowing them to maintain purchasing power over a decade's time (you can use median or average wage gains, at your sole discretion)?

Stimulati's picture

At the company where I work (mid sized US company that you've heard of) our prices are down 2% this year after a 3% decrease last year.  Yes, I think 2% is about right.

TruthInSunshine's picture

So now you're resorting to anectodal examples based on prices at the "company where you work."


Stimulati's picture

Better than you making up numbers out of your arse

TruthInSunshine's picture

I've given specific cites, providing actual percentages.

You can argue with those percentages, if you wish, but you haven't even bothered to do the same, and accuse me of "pulling numbers out of [my] arse?"

You're a SockPuppet. C'mon. I have always had this vision that one day a SockPuppet would come out and admit it, and that they might even provide evidence of their other 19 alter IDs...

Stimulati's picture

I've cited 2% and its closer to my reality when I work and shop.  I don't know anything about who funds the organization you cited but I do understand the method behind MIT's billion price index.  I also trust the CPI, which as you say is closer to 3% (and trending down).

TruthInSunshine's picture

. "I also trust the CPI"


I think you're a hopeless case. I am not intending to insult you, but rather, making an admittedly blunt observation.


"Closer to 2% where I work and shop."

And even if this were mathematically true (with you logging your purchases and dates, etc.), you're can't seem to acknowledge the uselessness of the whole anecdote 'thing.'


Then again, you could just be major league trolling.

barliman's picture


Simpler explanation ...

... he can't do the math and doesn't know the approriate terms to Google an online calculator.

Might I suggest ignoring the troll since there is no virtual sledge hammer to be found to put him out of our misery?


francis_sawyer's picture

The 'prices' his company charges may be 2% less, but he omits that the package volumes are 10% less...