EconoMonitor

The Wilder View

Barack Obama inherits the oval office….plus a truckload of public debt!

Barack Obama from Bloomberg:

“Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century,” he said. “There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair.” Barack Obama has avoided answering the ultimate question: How is he planning to pay for a new energy program, an overhaul of the health care system, new schools, new infrastructure, tax cuts to the middle class, and don’t forget the massive stimulus package that is almost certain to pass Congress. If it is by new debt-issuance by the Treasury, here is what he is up against.

Exhibit 1: National Debt is surging

gross_debt_chart.pngThe chart illustrates monthly U.S. national debt as a share of personal income spanning the years 1970 to 2008. In September, U.S. debt at 82% of income was the highest….ever. Since then, debt has grown by another $531 billion to $10.56 trillion on November 3, 2008 (election day) from new issuance to pay for the $250 billion capital injection plan and the Treasury’s sterilization efforts for the Fed.

Gross public debt is a function of intragovernmental debt (borrowing between U.S. government agencies) and debt held by the public (could be China, the U.K., or domestic citizens). In some sense, gross public debt is somewhat meaningless if a large share is just intragovernmental debt. Therefore, net public debt = gross public debt – intragovernmental debt is the true measure of indebtedness.

Exhibit 2: Net public debt is surging

netpublic_debt_chart.pngThe chart illustrates monthly net public debt as a share of gross debt (and its 3-month moving average) spanning the years 2001 to 2008. In September, net public debt grew to 58% of gross debt, and is expected to grow (See Brad Sester’s piece on new debt issuance). Over the years 2005-2007, one could have argued that the growth in gross debt was not a problem since most of the new issuance was intragovernmental. However, times have changed since the beginning of 2008. The U.S. Treasury issues a growing share of its debt to the public, implying that it is increasingly and truly on the hook for its debt payments.

We are borrowing more and more from global central banks (China, Russia, Korea, Japan) and from ourselves (American citizens). Brad Sester argues that the Treasury’s expected $500 billion in fourth quarter new issuance will be bought mostly by American citizens, rather than global central banks. However, it doesn’t matter who buys it as long as it goes to the public.

All we can hope for is a bit of fiscal responsibility after the U.S. economy emerges from this recession. The Treasury must pay down this huge accrual of debt. One can only hope that Barack Obama understands that he cannot have it all – many of his economic reform programs (health care, energy, schooling, unemployment insurance, union support, tax cuts to the middle class, new infrastructure) must be cut.


Originally published at News N Economics and reproduced here with the author’s permission.

2 Responses to “Barack Obama inherits the oval office….plus a truckload of public debt!”

artichokeNovember 5th, 2008 at 7:31 pm

That is unless he inflates to reduce the debt.Our creditors reasonably expect inflation. It is not a breach of contract. We should do it.

npr230November 6th, 2008 at 7:50 am

If we have debt w/ China, who’s currency do we give to them to pay it off? Ours or theirs? If the contract says that the debt is to be paid for with the US dollars then that would work but wouldn’t paying it off in foreign currency do nothing?

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