Tuesday, May 31, 2016

PAY ATTENTION: THe Federal Debt Is Getting Worse

 Charles Blahous writes:

The tenor of much recent coverage is that the federal debt is a fading problem, even though by any objective measure it is a serious one in the process of getting rapidly worse.

That the federal debt situation is worsening is easily seen by looking (see Figure 1) at the latest projections from the Congressional Budget Office (CBO).  Throughout the whole time CBO has made estimates, federal debt held by the public never exceeded 50% of GDP until 2009 when it began to rise dramatically, eventually reaching roughly 75% of GDP this year.  CBO now projects that we will continue to accumulate debt at unsustainable rates, exceeding 85% of GDP by 2026 and continuing to grow to eventually exceed our entire domestic economic output. Viewed objectively, our debt situation has grown much worse in recent years and is projected to grow still worse in the future.

Strangely, levels of concern over the national debt do not reflect this reality...
 Not only are things a little worse than we recently thought they’d be, they’re a lot worse than we expected several years ago.  For example, in January 2010 the baseline debt projection for FY2016 was 65.5% of GDP, substantially less than current levels.  In January 2009 the FY2016 projection was only 46.4% of GDP.  In January 2008 the FY2016 projection was a mere 26.4% of GDP. 
In other words, federal indebtedness is now nearly three times as serious a problem as CBO predicted in January 2008 that it would now be, while warning that “a substantial reduction in the growth of spending, a significant increase in tax revenues relative to the size of the economy, or some combination of the two will be necessary to maintain the nation’s long-term fiscal stability.” 
So no, the fiscal situation is not getting better.  It’s worse than it was before, and it’s worse now than previously projected.

3 comments:

  1. Robert,

    With the rising debt and increasing rates over the next several years, how do you see the federal government managing the debt service? It would seem that it would become impossible at some point and default would occur. Would it be through increased taxes, cutting the Federal budget or both? Thanks for your response.

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    Replies
    1. Default via inflation would be my guess.

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  2. Agreed. As a bear who is worried about the end game, this is what I'm glad to see you report.

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