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New data in the Federal Reserve's Flow of Funds report show that the national debt has surged at an annualized rate of increase of 39 percent between the end of June and the end of September.
The chart below shows the recent rate of increase, released by the Fed December 11. It is accelerating at a pace not seen since World War II.
Source: Federal Reserve, Flow of Funds Accounts of the United States, December 11, 2008, p. 6.
Overall the debt has risen by $1 trillion (about 10 percent) between late August and mid-November, reflecting a widening gap between spending (partly for new bailouts) and taxes (which are lagging in the recession). The Treasury has bridged the gap by offering new securities, and the national debt has soared.
This spike in the data probably should not be ignored as temporary response in an emergency. The absolute size of the debt (now $10.6 trillion) matters less than its size relative to the economy. But, as the second chart shows, the relative size of the debt--the ratio of the debt to output (GDP)--has also surged. Source: Bureau of Economic Analysis (for GDP) and U.S. Treasury (for total national debt).
In recent years, the debt-to-GDP ratio has risen sharply to levels not seen since the Korean War. By the end of the third quarter of 2008, the ratio was 73.9 percent, compared to 72.3 percent in 1952. The ratio also has risen steadily since the Millennium, when it was below 60 percent, pushed up by a steady stream of federal budget deficits. In the year since the recession started, the timeline in the second chart has gone seemingly vertical.
Many economists think we have no need to worry. They cite pressing short-term crises—the recession, the financial crisis, Detroit.
But even if you believe emergency measures are necessary, they come at a cost. Short-term solutions leave long-term bills to be paid, if not by us, by our children. This is what is at stake as politicians struggle to find a balance between what is merely expedient and what is sustainable.
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