Debt Soars at a Record Pace PDF Print E-mail
Written by R.D. Norton   
Monday, 15 December 2008 00:00

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.

Federal Government Debt Growth In Percentage

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.

Total Debt as Percentage of GDP Since 1950

 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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Comments (5)
Soaring Debt
5 Tuesday, 16 December 2008 08:48
Anthony V. Perrella, Sr
US Debt can only get much, much worse, especially under new administration. It will lead to hyper inflation and revaluation of currency;ie, issue new $ - in effect, default on government securities!
The Command-and-Control Economy
4 Monday, 15 December 2008 15:07
J D Steelman
The bail outs of the auto and financial industries are merely another step on the road to a command-and-control economy which began with the creation of the Federal Reserve in 1913. Fiat currency and fractional reserve banking have flooded the US with paper currency which has allowed the US to finance any number of misadventurs and wars - WWI & WWII, Korea, Vietnam, Bosnia, Gulf War I and II. It has created numerous malinvestment bubbles such as the dot com bubble, the subprime bubble. It has destroyed the wealth of Americans by robbing them of their hard earned money through various taxes and through the indirect tax of inflation which has depreciated the value of their money. Each step has resulted in more government regulation and control. There was the government nationalization of the rail freight business and rail passenger business of the Penn Central in 1970 after this large railroad went into bankruptcy. There was the ownership by the federal government of the Tennessee Valley Authority created during the FDR years. The nationalized US Postal Service. The state ownership of public education. And now another step - the nationalization of the financial and auto industries in the US. What industry or industries will be next? Each step brings more government control and direction over the economy and substitutes government's power and decisionmaking for the choices of consumers which is the hallmark of a free market economy. If free markets are good for Asia and Latin America and Africa as the US, the World Bank, the IMF and other multilateral agencies advocate why is a free market not good for America? Why must America become a command-and-control economy while China, India and other developing countries are liberalizing their economies?
The "Bailout Soap Opera"
3 Monday, 15 December 2008 13:14
Matthew Flynn
There have been countles of thousand of ventures that have gone under before & after the "Big Three". It's an awfully dangerous precedent when "Uncle Sam", without consent of the governed, not only even considers to subside private enterprise but to pick & choose which ones will draw the lucky straw. I say let 'em fail; it cleanses out the "rotten apples" & "dead wood". If Congress caves in & lets them have even one penny, I'd say it's about time for another revolution before we lose our country. The Constitution may be a paper document, but it's principles, so well conceived by our Founders, have been systematically and deceptively overridden, especially over the last 60-70 years, by groups such as the Council on Foreign Relations, The Trilateral Commission (i.e George Soros et al) & the Bilderberg Group.
INFLATION
2 Monday, 15 December 2008 11:46
STEPHENPATRICE
It would be interesting and vital to know what effect this huge debt will be on inflating the dollar and how to avoid its decreased value by by making smarter investment decisions than keeping your funds in assets that are affected by it
This economy
1 Monday, 15 December 2008 11:29
mnlipf
We have no need to worry? I'm glad that everyone has their rose-colored glasses on. When is government and the "economists" going to understand that until drastic changes are made that the world will continue to go the way it is? We are being given a wake up call by the Lord and everyone is ignoring it. When did greed and lust become part of the Ten Commandments? While listening to Fox News yesterday concerning the auto industry bailout, the unions are not willing to help with the reorganization, well, my thinking is "to hell with them then and let us all suffer." Why should they continue to make the exorbitant amount of money that they do and most of us are living paycheck to paycheck. The auto industry is not like it was in the past where the employees actually had to manhandled the auto parts. It's a streamlined process with minimal labor--not like it was. Why are they being paid so much to do so litte?

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