01.31.2010 0

Debt Held by the Public

  • On: 02/09/2010 10:38:54
  • In: Fiscal Responsibility
  • By Robert Romano

    Last week, Moody’s issued a very public warning against the profligate spending of the federal government just a day after the Obama Administration released its ten-year budget plan that will add some $10.634 trillion to the national debt by 2020. According to the warning, “If the current upward trend in government debt were to continue and become irreversible, the [nation’s Triple-A debt] rating could come under downward pressure.”

    When asked about the prospect of the U.S. losing its Triple-A rating, Treasury Secretary Timothy Geithner, speaking on ABC News’ “This Week” said, “Absolutely not… That will never happen to this country.” Never?

    Clearly uncomforted by Secretary Geithner’s dismissal of the problem, the Washington Examiner’s Mark Tapscott compared Geithner to the last emperor of Rome swearing up and down that Rome would never fall. The comparison is fitting. After all, the U.S. is not immune to the laws of gravity. This nation can be bankrupted, it can fail, and it is foolish to proclaim that it cannot.

    Never say never, Mr. Secretary.

    This year alone, the White House’s Office of Management and Budget (OMB) projects that Congress will add some $1.556 trillion to the national debt, which today totals $12.4 trillion. By the end of Fiscal Year 2011, the national debt will probably surpass 100 percent of the Gross Domestic Product, reaching an all-time high of $15.144 trillion.

    In its primer on the national debt, “A Double-A USA?”, the Wall Street Journal argues that the U.S. must bring down drastically the ratio of “debt held by the public” to Gross Domestic Product. It also suggests that the “U.S. isn’t in imminent danger of losing its Aaa rating, and it won’t do so even in the medium or long term if our political class responds in the right way.”

    But what of the debt-to-GDP problem? Particularly, it argued in favor of utilizing the “debt held by the public” figure, currently at about $8 trillion, as opposed to the total national debt, which is $12.383 trillion, when discussing the dangers of sovereign default. Why?

    Because more than $4 trillion that has in essence been pillaged from the Social Security Trust Fund and other government accounts represent “promises that politicians have made to taxpayers and can repudiate.” Therefore, that figure should not be utilized when publicly comparing the national debt to the economy’s ability to pay it back.

    Only, it hasn’t been repudiated. Nor is it politically likely that it will be repudiated any time before the actual national debt surpasses 100 percent of the GDP. Indeed, Barack Obama promises to borrow an additional $2.873 trillion from Social Security and other government accounts through 2020 to finance government spending.

    At the end of Fiscal Year 2009, which ended on September 30th, the “debt held by government accounts” stood at $4.331 trillion. It’s been called “money owed to ourselves.” In essence this is money owed to the American people. Money that was taxed on the promise to be paid back in retirement benefits, but was instead raided and now, having been spent, may forever be lost.

    But, it is still real money. The total national debt still represents nearly $12.4 trillion more spent than was taken in via revenue. Congress really spent that money.

    The government will keep “debt held by government accounts” on the books, even if it has no intention of ever paying it back, if for no other reason than to keep those books sound and to leverage it to finance the budget. Even if by doing so, it is merely engaging in a funny con-game; accounting gimmickry that would make Bernie Madoff blush.

    That is, if there is even any money left to raid. Consider this, as reported by USA Today, “Social Security’s annual surplus nearly evaporated in 2009 for the first time in 25 years as the recession led hundreds of thousands of workers to retire or claim disability… The impact of the recession is likely to hit the giant retirement system even harder this year and next. The Congressional Budget Office had projected it would operate in the red in 2010 and 2011, but a deeper economic slump could make those losses larger than anticipated.”

    If the U.S. were going to repudiate the Social Security IOU’s, now would be the time. These losses to Social Security are coming harder — and sooner — than previously expected. And millions of Baby Boomers are retiring or are about to retire.

    Or else, it would be high time to immediately present a plan that balances the budget and pays down the national debt. Before it is too late and the nation’s credit rating really is downgraded.

    The Obama Administration, for its part, assumes substantial growth over the next ten years, an average of 4.97 percent every single year. According to the White House, with its rosy glasses, the total national debt will not surpass 100 percent of the GDP until 2013, and the “debt held by the public” will never surpass it.

    The assumptions are absurd. The government assumes an almost 1:1 ratio between deficit-spending and economic growth: $10.634 trillion in new debt will equal $9.555 trillion in economic growth through 2020. That assumes that all of the money will be invested and, further, that over 90 percent of it will be invested profitably such that it will generously grow the economy.

    Only, that money is not being invested, nor will it become profitable, because it will increasingly be spent on the collapsing entitlement system. So-called “mandatory” spending will increase from the current annual $2.123 trillion for 2010 to over $3.384 trillion for 2020.

    The Journal puts the lie the OMB’s rosy scenario: “These White House estimates are surely understated if current U.S. policies continue. The Obama budget assumes its tax increases won’t affect investor behavior or reduce growth. Passing ObamaCare would send the debt ratio even higher, probably past 100% within a few years as spending soared and the illusionary cost savings failed to appear.”

    To make matters worse, net interest owed on the national debt will grow from the annual $188 billion in 2010 to over $840 billion in 2020. And, that’s a conservative estimate, assuming that the nation manages to keep its Triple-A debt rating between now and then, and that interest rates on that debt do not radically jump as result.

    Apparently, it’s hard to see the red stop light when one is wearing rose-colored glasses.

    Robert Romano is the ALG Senior News Editor.


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