Debt Clock craziness

I get a nontrivial amount of traffic these days from debt-clock watchers, so it's time for a reminder regarding how it's maintained here. Because of our current once-per-century upheaval in the financial sector, there's a half-trillion dollar difference in the debt numbers reported in two different places at the US Treasury's website.

Here's the comparison, both from the US Treasury website as of the morning of Nov. 11, 2008:

This page estimates the day-by-day debt balances; the balance for 10/30/08, the latest day available, was estimated to be as follows ("mm" = million$):

10530.9 mm Total
 6257.6 mm Publicly held

This page, on the other hand, is the source for the Treasury's official monthly report; the September report reads as follows:

10024.7 mm Total
 5808.7 mm Publicly held

I calibrate the clock (at right) once per month, using the official report. I also estimate the daily growth of both debt and GDP based on recent trends from monthly reports. Because those numbers and trends become ancient history very quickly in today's environment, we can expect some crazy-looking numbers as the government sells huge quantities of Treasury securities, then subsequently buys many (or all) of them back as the TARP program plays itself out. 

My assessment of our federal debt situation
GDP is shrinking, debt is growing; consequently, the ratio of debt/GDP is growing more rapidly than we've seen in a while. Am I worried that we now have "too much" federal debt? No, not yet. Reason: the debt level per se will not hurt us; what would hurt is a significant increase in interest rates on Treasury securities, a jump in inflation, and a tanking dollar relative to other key currencies. But in the last several weeks, interest rates have dropped, we've had deflation instead of inflation, and the dollar has jumped in value. In short, the buyers of T-bonds and US dollars have been expressing confidence in the future of those instruments relative to their other choices, and therefore confidence in our creditworthiness. We have plenty of "borrowing capacity" as long as those conditions hold.

That's the good news. The concern is that we will soon be taking huge bites out of that "borrowing capacity" if next year's fiscal deficit comes to a trillion dollars, and if the TARP program ends up leaving an unexpected amount of new debt on the books instead of nearly breaking even.  Will those bites cause high interest rates, high inflation, or a falling dollar? Time will tell.

The only certainty is that a strong, growing economy in the long run is the only way out. It is folly to place a higher priority on "reducing the debt" or "reducing spending" than on growing the economy. The raw dollar level of debt is infinitely less important than an economy sizable enough to sustain any given level of debt. (Would you feel comfortable with $100 trillion federal debt in a $200 trillion economy? I would.)

Once again: growth is the key. I've been saying that for four years here. But these days, it should be obvious that to get back onto the growth track, we'll need to stop the bleeding first (i.e., the shrinking GDP). While we're doing that, it's nice to know that we apparently have a substantial amount of "borrowing capacity" to fall back on, isn't it?

Comments

[Jimmy the Dhimmi]

President Barack Obama claims that the economy grows from "the bottom up" and that taking money away from the wealthy in the form of higher taxes, including on capital gains, and the distributing that money in the form of cash payments to lower income people with no tax liability will be the key to success.

1) Do you agree with his approach generally,

2) Do you think he will go through with this tax policy during this crisis?

[Optimist123]

Jimmy:
(1) No, I don't agree with that approach. See my newest article. (2) I think there's an 80% chance nobody's tax rates will increase as long as we're in a recession.