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.
The chart below demonstrates the difference between cumulative deficits over the past 43 monthly periods, superimposed on the total debt issuance over the same period. As is plainly evident, the two lines diverge rather rapidly.
Presenting the same data on a non-cumulative monhhly basis demonstrates that out of the 43 periods, debt issuance has been greater than any given period's deficit on 25 occasions. As noted previously, the total cumulative divergence between the two data series amounts to just over $1.4 trillion during this period.
A simple exercise in divergent statistics indicates that total debt has surpassed total deficits by 48.2% over this period. In other words, assuming the latest CBO figure of a $10 trillion deficit over the next 10 years is correct, we will likely see $14.82 trillion in new debt issued, thus bringing the 2020 debt to a grand total of $27.7 trillion (when added to today's total of $12.9 trillion, which means a Compounded Annual Growth Rate in the US debt of 8.9% for the next 10 years.
So with everyone recently transfixed by such fractions as Debt/GDP ratios, we decided to project what the US debt-to-GDP ratio would look like, assuming two scenarios for US growth: a baseline 2% annual GDP growth until 2020, and an upside 2.5% growth rate. The results are not pleasant. In the base case, we see US Debt/GDP hitting 159% by 2020. In the upside case, this number is a much more "bearable" 154%. Surely these numbers merit a AAA rating by the rating agencies.
Of course, none of these numbers assume that the $6.3 trillion in GSE debt will be onboarded, as the government will never recognize just how bad its off-balance sheet picture truly is. If GSE debt were to be added to the total debt tally (kept constant through 2020), total Debt/GDP would be 186% in the base case, and 195% in the upside case. Should we add the roughly $80 trillion in other unfunded liabilities such as SSN and Medicare... well, you get the picture.
And here we are worried about what European contagion could look like a few years down the line.
h/t Mike Cornips