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Federal Debt Bubble - Supporting Information


Why Do We Focus on Public Debt?

The total US Federal Debt has two components - (1) Debt Held by the Public and (2) Debt Held by Government Accounts.  The Debt held by Government Accounts is money that the government has collected for one purpose (Social Security, federal employee pensions, etc.) and immediately spent on something else.  It no longer really exists.  When it comes time for those government accounts to “redeem” that debt to pay benefits, the money will either have to come from current revenues (taxes) or from additional public borrowing.  Therefore an analysis, such as this one, that looks at the Debt over an extended period of time treats the Debt held in Government Accounts as irrelevant.  It is through analysis of the level of the Debt Held by the Public that we are able to make meaningful “apples-to-apples” comparisons over decades. 

The Limitations of Economic Projections & the Sources for the Data Used
No attempt to project what will happen to the US economy seventy years into the future can possibly be accurate.  That’s like saying that someone in 1930 could have predicted all of the ups and downs of the economy, the wars, the policy changes, the financial bubbles, and the innovations of the last 70 years.  What it can and does show us is what will happen if we keep doing what we have been doing and nothing really bad happens to make it even worse.  Only positive, decisive action can build a better future for America.

The sources for the historical data used in this analysis are the White House Office of Management and Budget (OMB) and the Congressional Budget Office (CBO).  The projection of what will occur over the next 70 years is based on the CBO’s Alternate Fiscal Scenario.  Per the CBO - The “alternate fiscal scenario” represents one interpretation of what it would mean to continue today’s underlying fiscal policy.  This scenario... incorporates some policy changes that are widely expected to occur and that policy makers have regularly made in the past.

We have not attempted to factor the effects of the Affordable Care Act into our Debt projections because the impacts are much too nebulous at this point in time (this analysis was completed in 2011).  Given the large increase in the numbers of people for whom the Federal Government will subsidize health care and the lack of significant mechanisms in the bill to control costs, we believe this bill as passed will only add to the growth of the Federal Debt making a bad problem worse. 

Debt as a Percentage of GDP
Throughout this discussion, we use Debt as a Percentage of Gross Domestic Product as the measure of the magnitude, and therefore the “severity” of the Federal Debt at any point in time.  Let’s look at an example to understand why this is the best way to compare debt levels over time...


At the end of 1945, the Federal Debt Held By the Public was $235 billion or 113% of the GDP.  We actually ran a budget surplus in 7 of the next 14 years.  The surpluses were then cancelled out by the deficits in the other 7 years.  By 1959, Federal Debt had grown back up to $235 billion.  But between the end of the war and 1959, the size of the overall economy more than doubled.  Sixty percent of that growth was due to real economic expansion and 40% was due to inflation.  As a result, the $235 billion debt in 1959 equaled only 47% of GDP.  Still higher than anyone would like, but much less of a risk to the overall economy than the 113% in 1945.


To put it in personal terms...  If you take out a loan for $5,000, the payments are much easier for you to handle if your income is $75,000 per year than it would be if your income was $25,000.   The absolute size of the debt doesn’t matter very much.  It’s the size of the debt relative to the economy that counts!