Federal Debt Crosses $18T Line

“Debt held by the public” in the graphic below is Treasury bills, notes, and bonds.  “Intergovernmental holdings” are special bonds, the debt of the federal government to independent federal agencies, the largest of which is the Social Security Administration.  Keynesian economists like Joe Stiglitz and Paul Krugman ignore that intergovernmental total on the argument that there’s no legal obligation to fund Social Security.  Legally this is true, since the SCOTUS has so ruled repeatedly.  Politically, that argument is completely asinine.

So in due time – by 2031, if the current SSA estimate is correct – that $5.1 trillion will have to be funded, and the only way to do that is to sell more Treasury bills, notes, and bonds; print more money; or collect more taxes.

That $5.1 trillion, of course, is on top of another roughly $7 trillion in additional federal deficits over the next 10 years, the best current Congressional Budget Office forecast.  Twenty-five trillion dollars in total debt by 2024, best case, best guess.

Two factoids fall out of this.

1) To keep the debt-to-GDP ratio under 100%, the economy is going to have to grow at 4% annually for the next decade...about double the pace it’s grown in the last 10 years.  What are the odds?  Growing at 3% on average would leave us at 111% of GDP in 2024.  A 2% growth rate leaves us at 121%.  Split the difference and say 116% by 2024.  There’s only one country in the EU with a central government debt-to-GDP ratio that high today: Italy.  We're on track to become Italy; wrap your mind around that self-inflicted wound.

2) If the average interest rate on government debt in 2024 is 4%, about the long-term average, the annual interest expense will be $1 trillion a year.  That’s just the interest.  As noted above, the government has only three sources of money to tap to pay that interest every year: borrow, tax, print.  Choose your poison.

Obama wants the U.S. to be the EU.  Unless something changes radically and very soon, he’s going to get his desired result.

H/T to ZeroHedge for the graphic.