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Understanding Federal Debt: Point – Counter Point

Written by admin | Oct 20, 2014


A couple of days ago I wrote about a chart created by Der Spiegel, which Barry Ritholtz commented on at his site. Barry sent me an email with some criticisms of my analysis and he shared the gist of the email in this commentary on his website. I would like to take this opportunity to respond.

However, first I want to make clear that I have great respect for Barry and regularly visit his website. Furthermore, I want to stress my belief that what makes the blogosphere so valuable is the give and take between commentators, which leads to better data analysis, and that is crucially important for us all. So I am publishing my response to Barry’s points in the spirit of creating a better understanding of the Federal debt issue as it stands today.

Before I get to Barry’s points I want to address the corrected Spiegel chart.   The left chart is the percentage increase of total debt THROUGH the end of the 2013 fiscal year budget of Obama.  Spiegel only used the first two years of Obama’s term in their analysis which skews the data when comparing it to Bush’s debt legacy which span an 8 year period.  The right side is the same chart through the end of the 2013 fiscal year adjusted to inflation by using 2010 chained dollars.   We will revisit both of the points momentarily.

Barry raised three main points that I feel obliged to address:

1) Barry states that the actual budgets of each President should be used in order to determine the amount of debt incurred by each President while they were in office. He states: “The debt each President creates is a function of the budgets each President submits to congress. It is not based upon the literal time they spend in office. Therefore the only objective way to view the data is BY EACH PRESIDENT’S BUDGET.”

I do not disagree at all with his point and the data that I have used is the FISCAL year data as presented by the Treasury in my orignal post.   However, where the Spiegel chart and the orginal commentary fall short is basically just in clarifying the information which I will hope to clear up here.

debt-realfederaltable-102011-32) The Spiegel chart and Barry’s analysis show that George W. Bush created, both on a percentage and dollar basis, significantly more debt than Barack Obama. Specifically from 10/1/2001 to 9/30/2009 Bush’s debt contribution was $6.1 Trillion versus Obama’s debt contribution from 10/1/2009 to 9/30/2011 of $2.9 Trillion.

While these are significantly large and mind boggling numbers, they are misleading. Bush’s debt contribution occurred over an 8-year span as compared to Obama’s 2-year span, as noted in the table.

If we extrapolate Obama’s spending spree to a full 8 years for an equal comparison to Bush’s term, you are looking at an $11.6 Trillion debt contribution. Even if Obama doesn’t get elected for a second term his total debt accumulation will most likely exceed $5.8 Trillion by the end of his first term, which will be neck and neck with Bush’s entire 8 year run.

The point in my original article was less about the actual chart and more about the decline of the U.S. economy since 1980. In my article I stated: “The real story is that we are all to blame in some part for the situation that we currently face today. As we have shown many times in past missives; the ‘debt super cycle’ that began in the 1980’s wasn’t just a function of the parties in power. It was a party that we all participated in.

Whether it was the Administration and Congress setting the table, loose regulatory authority turning a blind eye, lobbyist bribing their way in or banks spiking the punch bowl; in the end no one forced the party goers to imbibe beyond excess. Yet, we gladly did. We all drank and drank deeply. We just don’t like the hangover very much.

The Austrian economic school had it right. When you maintain low interest rates for far too long, it creates as excessive credit boom that leads to the destruction of personal savings and malinvestment. Well, ladies and gentleman, here we are. Thirty years of excess has deteriorated economic growth, as increases in debt have destroyed economic growth by diverting personal savings away from productive investment.

Which brings me to my next point:


3) Barry is correct. The numbers he used were NOT inflation adjusted. So, using 2010 chained dollars, we can take a look at the progression of debt from 1900 to present. You can clearly see the ramp up in Federal debt as we entered World War II. But the cart came off of the proverbial tracks in 1980 as we begin a long and unbroken string of deficit spending. We can extrapolate the curve out using the OMB estimates to show the progression over the next few years as well (red line).

Here is the real story. While Barry and I may disagree on the right way to calculate who is responsible for what in terms of debt accumulation, the real issue is the undeniable mess that we are currently in.


Prior to Reagan entering office and the rapid growth in deficit spending — the beginning of our “debt super cycle” — it required roughly 21 cents of debt to create each dollar of GDP growth. Today each dollar of economic growth requires $4 in debt, which is clearly an unsustainable trend.

Once the debt required to create $1 of GDP growth exceeded $1, the rate of economic growth in the U.S. has been on a steady decline. Unfortunately, while debt was accumulated and savings depleted in order to sustain an extraordinary lifestyle for the last three decades, the ability to create productive investment has been depleted. The fiscal and monetary policies implemented by the last five administrations have left the country in a far weaker state, as each President continued the failed policies from the one before.

Now we must deal with the issues. This is no longer a time for finger pointing and blame. It is now a time for resolution, a time for unity and a time to start making progress toward solutions that restore America to its former greatness.

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