Wednesday, January 23, 2013

Deficits Ain’t Debt


Lots of talk about “deficits” of late. I’m not sure what a deficit really means. Consider the Clinton years. The economy was good, there were no wars or disasters, the deficits were small, there were a few years where there was a budget surplus. – Aaaah –  The debt exploded during those “good” years. The cumulative deficit for the Clinton years was only $327Billion, but the debt rose by $1.56 Trillion (475% more debt than deficits).


The deficit is a component of the debt. But it is not the only driver of debt. The following chart is the difference between the reported deficit, and the increase in debt going back to 2000.




The cumulative deficits add up to $6.9T, while the increase in debt is $10.4T. Over the past dozen years, debt has exceeded deficits by $3.5T (50%).


I bring up the discrepancy between debt and deficits to make the point that they are quite different, and any “happy talk” about deficits improving over the next few years should be tempered by the facts about debt.


First an explanation for the $3.5T discrepancy between debt and deficits. The vast majority of the difference is attributable to the country’s Trust Funds (SS, FERS and MRF – private/federal/military retirement). In past years these Funds have had true cash surpluses. The Funds lent the surpluses back to the government, and Uncle Sam promptly spent the loot.


In Washington they have funny accounting system that allows them to create both an Asset (the Funds) and a Liability (Treasury). On a “Unified” basis, the asset and liability net out, and therefore it is magically not reflected in the budget deficit. There are two sets of books, one is flawed accounting, the other is the real debt.


Within the definition of debt is the Debt Owed To the Public (DTP), and the Intergovernmental Debt (IG) (owed to the Trust Funds). Follows is a chart of the two categories of debt. Note that DTP has been exploding while the IG debt has stabilized.




The future of the Trust Funds is absolutely clear. They are in permanent decline. Every year they are forced to redeem a portion of their “savings” to meet current requirements to pay benefits. The cash drain will be approximately $70b in 2013. This will force Treasury to borrow an additional $70B ABOVE and BEYOND what the deficit will be. Every year the TFs will be forced to redeem more and more bonds, and every dollar must result in an increase in the DTP.  Over the next few decades the TF will force an increase in the DTP of at least $5T. Five years from now the TFs will be pushing up DTP by $200b a year. After ten-years, the numbers go ballistic.


Again – this increase in DTP will be in addition to the annual deficits the country has now programed in. And again – none of this will ever appear on what is know as the budget.


The budget debate is bullshit, what matters is the Debt to the Public, and no one is looking at that – for now.





  1. Excellent point, Bruce. And one that will assiduously be avoided by all politicians and the delusional people who believe in the TFs, of course.

  2. You forgot the DTP and IG chart. I am sure it is a bad chart but we should not ignore it.

  3. As the TF’s pay out more than they take in, don’t they simply call the “IG” debt (past surplusses) from the treasury, thereby reducing the IG debt total? At worst the treasury is transferring IG debt to PSD debt (since the treasury already spent the TF’s surplus and now needs to borrow from the public to repay the debt), keeping the overall total debt stable, at least as it relates to spending by the TF’s. I understand this is still not sustainable over the long-term, but it does leave room to kick the can.

    • Yes, this will be a switch. IG will go to zero, DTP will go up dollar for dollar. That is the issue. PSD is been increased by two sources, the deficit, and the borrowings required to unwind the Trust Funds.

  4. I think i disagree.

    I think it is the total debt, not the debt to public that matters, not just dtp.

    It all has to be paid and there is nothing to pay the ig, so it counts just as much as the dtp, hence, the total debt is what counts.

    At least that’s what it looks like to me.

  5. All the empty promises from Social Securty and Medicare are “current benefits” — they are not entitlements, no matter how many stupid media morons claim otherwise. That is the law, and has been the law all along. It was ratified by the Supreme Court in the 1960s …. no matter what taxes (not premiums) you think you paid “into” the non-existent funds. Suckers / citizens are “entitled” only to the benefits Congress allocates at the time.

    This is the legal “logic” that Congress uses to claim that Social Security and Medicare benefits “don’t count” — because future crooks in Congress may or may not chose to pay them.

    Ergo, “IG” debts are not really debts, they are implied promised from Congress subject to “change” (default) as soon as it becomes politically expedient

  6. Wondering if someone can explain this to me. Conservatives rail about how much in debt the country is, and this debt needs to be paid back someday. But what I don’t hear anyone talking about in this context is the fact that the US dollar is also the world “reserve currency”, in that energy (oil) is exchanged using dollars. So the supply of US dollars has to keep pace with world population and productivity growth, correct? Therefore if the US somehow “paid back” all the debt there would be no units of currency available in order to facilitate trade. Hence, not only will the debt not be “paid back”, it can never be “paid back” as long is the dollar functions in this role, correct? So the question becomes: what is the “correct” or “acceptable” rate of growth of the US debt outstanding? Also, it seems to me, that the US has benefited greatly by having the dollar function as the “reserve currency”, in that all this spending to produce the dollars in the first place amounts to a “free lunch” for the US. I guess this is reward for winning WW2 and the Cold War?

    • @tom —

      If you want to argue that the supply of the US dollar needs to expand to accommodate global growth (or US growth) … you might want to pull your head out of your ass long enough to notice that growth of US debt has FAR outpaced US GDP growth and global growth. US debt has grown twice as fast as economic growth and that is a huge problem

      Go ahead and make a further ass of yourself babbling on about China or other asian tigers. Global growth includes every country, not just the ones in the NY Times front page. Global growth, including China and Cuba/Venezeula, has been around 3-4% annually since the US government started collecting a federal income tax (and before that, England was the global power / reserve currency).

      Who is talking about paying back *ALL* debt? What a dumb comment. Lets hear your plan to pay back *ANY* debt? take debt as percent of GDP back down to 1960s levels (which led to inflation / end of Bretton Woods — but were night and day better than today)

      Total debt has grown much faster than the economy (US or global) — and needs to be paid back to levels before the selfish baby boomers started partying like drug addicts. That is the minimum needed to allow baby boomers to retire.

      No, I don’t think the debt boomers are going to pay back their debts (EVER) — which is why the country is screwed. Fuck you deadbeats. You created nothing, took credit for your parents sacrifices, and left your children with a terrible burden.

      • Bubba, please unbunch your panties. I was simply trying to find out what particular impact the role of the US dollar being the world reserve currency has on the requirement of the US to provide more dollars, which necessarily means more US debt. I don’t know what the hell else you’re going on about but you didn’t even address this question. As for the “boomers”, damn I don’t know where to start, but how about this: if SS were truly “pay as you go” then there should have been far far less money taken from paychecks in the last 50 years. Instead, the entire size of the SS “trust fund” is nothing more than excess wealth stolen by the government from the “boomers”. The incessant whining from the younger generation is intolerable – they need to get off their lazy asses and start producing and start electing people to office who will make the hard choices and stop the handouts.

        • The US has zero “requirement” to provide more dollars. Dollars exist for the benefit of the US only, that is why they are called “US” dollars. RTFM

          Social Security *IS* pay as you go, has been for decades. That was and still is the law. Learn to read before you learn to comment.

          Younger generations will never get any Social Security in real terms, not even according to the crooks in Washington DC. It is age discrimination.

          And before young people worry about paying for boomer’s retirement, we still have to pay for your overpriced colleges and the trillions in public debt that you deadbeats are leaving as your legacy. Paying for your golf games and unnecessary medical procedures is simply not a priority. We don’t need to honor your unfunded promises

          • Bubba Joe, you’ve got your generations confused. The “Boomers” have been paying staggering amounts for “The Greatest Generation” and “The Silent Generation.” The ration of expected pay-ins versus probably payout rations is available from several sources, including the GAO. The short answer is that if you were born after 1940, your payout ration has been getting nothing but worse. As the person responsible for my parents’ (and formerly for my grandparents’) books and taxes, I can assure you that what they’ve received is tremendously excessive on any rational bond-yield basis. For me five years from now? Not so much. TGG saw nothing but secure pensions and a fabulous return on government programs. So has TSG. The Boomers are just starting to retire, paid a much higher percentage than the prior two gen’s, and there is no money left.

            • @Roping — no generational confusion. Soc Sec is and always was a pyramid scheme, and it lasted this long because the boomers were and still are stupid enough to believe this ponzi scam is an “entitlement” … even after the Supreme Court ruled that it was not.

              Mediscam is a tougher call, given that LBJ expanded it beyond reason. You have to be a total failure at math to think Mediscam is working, and you have to be anti-USA socialist to think it can be expanded into ObamaCare. RomneyCare is already forcing Taxachussetts to raise taxes; wait till the math morons of USA get the bill for all the “free” ObamaCare

              Given that SS’s pyramid scheme status was well known by the time Generation X was prom night twinkle in their parents eyes — its pretty stupid for anyone to expect a pyramid scheme to continue when there are a lack of suckers to pull into the pyramid.

              Boomers are stupid because they knew SS was always a pyramid scheme — it was in dozens of newspapers, magazines, supreme court decisions, etc. And now these idiots think they are going to retire on a ponzi scheme + no savings + $17 trillion (and counting) debt?

              Obviously those Woodstock LSD trips effected boomer cognitive abilities far more than you are willing to admit

          • It’s not “pay as you go”, it’s more like “bend over and take it the ass as you go”. What I think “pay as you go” should mean is this: Every year the CBO estimates how much money will be required for SS payouts in the following year, and then Congress sets the FICA tax rate to raise that amount of revenue. Over time this would increase by small increments, but they would be visible small amounts and reflect accurately how much SS actually costs. Also it would have left more money the hands of private citizens to spend or save as they wish. Instead, FICA has been way too high, to the tune of $2.7T of accumulated funds to date, all of which is nothing but a stealth tax on the “boomer” generation and has all been spent by those cocksuckers in D.C.

            • Bubba wrote: Dollars exist for the benefit of the US only, that is why they are called “US” dollars.

              Not since Bretton Woods.

            • It is pay as you go. It was always pay as you go, but just in case you are too stupid to fail from American Idol — the US government even labeled SS as pay-as-you-go back in the late 1970s.

              But the system was always a pyramid scheme. The first recipient paid in for two weeks, yet drew benefits for two decades. Other than the suckers (younger workers), who do you think paid for her benefits?

              That worked only because the boomer generation was much larger than any before it — all pyramid schemes require exponential growth of suckers. The minute the sucker population stops growing, the pyramid collapses. That is what is happening now — generation X is smaller than the boomer generation, never mind exponentially larger. FDR’s pyramid scheme is collapsing.

              And yes, you should feel like an idiot for not realizing this 50 years ago — it has been widely publicized for decades.

              RomneyCare is already imploding under unsustainable costs — so is the NHS in England. ObamaCare is unlikely to survive his 2nd term. Even if Dumbo the Pres gets the votes, the country doesn’t have the wealth to make his fantasy work. Either the federal government collapses, or ObamaCare collapses (or both)

              Only an innumerate moron would call Obama’s re-election a “victory” for him. A smarter politician than Obama would have stepped aside and let Romney take the fall for ObamaCare … but Obama is not that smart.

  7. Bruce:
    Good article – I wish a few more politicians and media pundits highlighted the difference between deficit & debt. Anyway, you clearly point out the problem, what I’d like to know is how you think this plays out… that could be a series of blog posts in itself maybe?

    Things that come to my mind:
    High entitlements = unsustainable in low growth economy, so…
    => ZIRP to ‘encourage growth’ (fails)
    => currency debasement (via QE etc) to boost exports (doomed to failure)
    Beggar thy neighbour (currency wars) = unsustainable (all fiat currencies race to bottom), so…
    => Inflation rises (eg Japan is targeting inflation), some debt inflated away
    => Bond market spooked by inflation
    => Interest rates rise? (interest rates currently at unsustainable lows)
    US Bond Market Crash??
    => Knock-on effect on US Stock Mkt??
    => Deficit balloons out of control, becomes clear that Central Banks cannot control mkts…??
    Panic across global markets (the next crash), so (just when everyone predicts the end of the world)… we have:
    => New “Plaza Accord” meeting amongst G20 to stabilize currencies (SDR basket includes some ‘commodity’ component), many currencies re-valued
    => Global agreements on debt write-downs
    => Entitlements massively reduced, pension ages increased etc etc

    Would welcome people’s thoughts.

    • I touch on these topics from time to time. We do have currency wars. I think this important. This creates the possibility of a new Plaza Accord.

      Something like that could only happen if there were a “crisis”. There is no crisis anywhere today that I can see with my eyes.

  8. Fixable by one simple remedy: TRAIN MORE PHYSICIANS!

    The AMA, worried about a “doctor glut” in the 1970s, limited the number of medical school and residency training slots. As a result, American medical schools graduated the same number of physicians, 16K, every year from 1980 to 2009 – while the population went up 50% and aged. Result? Your doctor is always very busy, and can charge you a lot of money. Retiree medical costs have bankrupted every American industry around long enough to have pensioneers.

  9. Interesting, isn’t it, how “Trust Fund” has the same two initials as “Tooth Fairy” ?

  10. Yes, most people today are innumerate, and most of those DON’T CARE, and will be “shocked” when the house of cards falls down! TPTB have what they want—a nation of dumbed down & zombified worker bees. Don’t forget that AARP and many so-called financial planners are STILL TODAY talking up the SS “Trust Fund”. We’ll ALL get screwed when it collapses.

  11. Let’s not forget INTEREST EXPENDITURE. We are nopaying out a wopping $10b a week with 40% going to foreigners. So when you hear the politicians arguing about the Debt Ceiling it’s really about paying the BONDHOLDERS. It’s not about you and me but about them staying in power and refusing to reform. The bondholders do not want to see the money hyperinflated away. The people are saying save the country and to hell with the bondholders.

    • Brian, we know just how much the Obama regime cares about paying bondholders or otherwise honoring contract law (or the rule of law in general). The T-bond bubble is the biggest in financial history, and when the FED can no longer sustain ZIRP it WILL pop. Even if the T-bond market didn’t collapse, the drastic rise in interest payments would wreck the federal spending obligations.