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Cost of carrying exploding US debt hasn’t exploded

 

I was mucking about the U.S. Federal Reserve’s economic database and thought sharing some data would help put into perspective why some people are losing their minds over the levels of US debt, and others seem to take it in stride.

If you look at the total federal public debt from July 1st, 1992 to July 1st, 2012, it has increased from about $4 trillion to $16 trillion. The new debt ceiling of $16.4 trillion has effectively been reached and U.S. Treasury Secretary Tim Geithner sent a letter to congress back on December 26th, 2012 indicating he had to suspend debt issuance and borrow funds from federal employees’ pension funds to buy the government breathing room for a few weeks. So, it’s a big deal.

But an increase in debt from $4 trillion to $16 trillion needs more perspective. Halfway through that 20 year period, it was roughly $6 trillion. So for the first 10 years, the increase was $2 trillion. The last 10 years has seen a $10 trillion increase. That sounds pretty scary, and here it is graphically. (Note all data is sourced from FRED – Federal Reserve Economic Data unless otherwise noted.)

You can see why there is all the hoopla in congress.

Of course, a “simple” measure such as the total debt outstanding doesn’t give you the entire picture. One needs to relate it to the capacity of the economy as a whole, which has increased in size during those same 20 years. Here is the GDP in the US from 1992 to 2012:

The GDP, or the US economy, grew a bit faster than the rate of growth of debt from 1992 to 2002, but then debt started to grow faster than the economy from 2002 to 2012. When you put the data together, you can see the debt as a percentage of GDP, which tell us more than just “total debt”:

Now it’s a little bit more clear. After hovering around 60% for the first 16 years, the debt as a percentage of GDP shot up to 100%+ over the last 4 years.

So that’s partly why it’s been so prominent in the minds of political parties and the news lately.

Not to suggest that the Republicans aren’t vocal enough on the US debt, but perhaps some people are wondering why the movement to curb debt at all costs isn’t ubiquitous in all quarters of US politics. Isn’t it clear that this debt is unsustainable?

Well, it’s not clear, because it is actually perfectly sustainable at this level (however handcuffing fiscally and politically). What debt, GDP, and debt-to-GDP don’t tell you is how much the interest payments actually are. And just as the Canadian housing market has essentially been fuelled by cheap and freely available money, so has the capacity for US government debt.

Behold the annual interest payments on the US federal debt as a percentage of GDP:

Yep. It’s been getting cheaper to maintain an ever increasing debt load. Over the last 10 years, the US went from paying $332 billion to carry $6 trillion in debt, to paying $359 billion to carry $16 trillion.

As you can surmise, low interest rates have made this possible. The average interest rate paid on US debt in 1992 was roughly 7.19% (versus roughly 2.19% in 2012).

Every increase of 1% in the average interest rate on US debt would increase the annual interest payments by $164 billion. Interest rates have implications fiscally and politically that shouldn’t be underestimated.

Related posts:

  1. US Debt Clock
  2. Data visualization of Eurozone debt over time
  3. A New Year's Resolution for 2008 if you carry high-interest debt

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About Preet

Preet Banerjee is a Canadian personal finance commentator. He is a television host for The Oprah Winfrey Network, a Money Expert for The W Network, a personal finance columnist for The Globe and Mail, and a regular panellist on CBC's The National with Peter Mansbridge. He also appears frequently as a guest commentator on a variety of other programs and media.

Comments

  1. Dan Murray says:

    Thanks for the share. Unfortunately this dead load is a tinderbox. When interest rates float back to more normal market rate the debt service will explode.

    • Preet says:

      Perhaps I was too subtle. I was implying not only that, but also the potential of that happening being devastating enough as to influence policy to keep rates low.

      • Connie Walsh says:

        Influence … even that is too mild. I think the Federal Reserve has it’s marching orders.

  2. But it is not sustainable Preet. It would only be sustainable if the US had the revenue to pay interest + expenditure without having to incur yet more debt. It does not. To cut expenditure risks cutting the GDP growth or base, further impacting revenue and hence debt sustainability dynamics.

    Also, you have not adjusted for the fact that nominal GDP growth has come down markedly over the same period and debt to GDP ratios across the board are much higher now.

    Much of the GDP base has been built on debt accumulation meaning that in a period of debt and deficit reduction, for a given level of interest rates, less debt can actually be carried. Relationships are now inverted.

    Debt payments as a % of GDP may only be some 2.53% of GDP (BEA data) as of Q3 2012, but as a % of average annual compound GDP growth over rolling 5 year periods, it is 111% of this, compared to around 85% in 1992 and 30% in the early 80s when interest rates were much higher. Also. the Q3 2012 government deficit is 2.3 times the budget deficit seen in 1994 Q3, some 3.5 years post the early 1990s recession end.

    Also, interest and other miscellaneous receipts have also declined by a significant rate – from 1.5% of GDP in Q1 1992 to 0.73% in Q3 2012, which again has significance as an order of magnitude relative to GDP growth rates.

    Interest payments only tell part of the story and the above is only a brief analysis.

  3. Thanks for the the valuable suggestions…keep writing on this topic. Interesting, clear and precise. Another good post Preet.