USA's debt burden unchanged in ten years

Everybody knows that the level of the U.S. federal debt has been increasing rapidly. Less well-known is that the burden of the debt is the same today as it was ten years ago. Believe it or not.

Although that should be good news, there’s bad news, too: that situation cannot last if the economy continues growing at nothing more than an anemic pace. It only means we have some runway remaining in order to get the economy growing again.

Back to the main point, though. How could the burden of the debt be no higher than it was ten years ago? In short, it’s because the burden of the debt is not the same as the level of debt. The debt burden is the affordability of any given level of debt, not the debt level itself.

A good indicator of the debt “burden” is the portion of federal tax receipts it takes to pay the interest on the publicly-held debt. (The inverse of that is the number of times federal tax receipts cover the interest payments—closely mirroring a widely-used private sector measure for a company’s debt burden, dubbed “Times Interest Earned.”) The two graphs below show both ways of looking at the debt burden (...back to 1998, which is as far back as the Treasury’s website goes with historical data). 




Of course, today’s near-zero interest rates are helping to keep the burden down. Those low rates are largely attributable to the dollar’s status as the world’s favorite currency in a pinch—but the longer it takes to get our economy back on track, the less we can expect to milk the dollar's favored status.

Paying the interest, rolling the principal
People with private-sector financial experience know that the “burden” of debt for a healthy, going concern such as a business or a multi-generation family is the affordability of the interest that must be paid to creditors. Why just the interest? Because a healthy going concern can roll the principal over and over, consistently retiring maturing obligations and replacing them with newly-issued debt instruments. That financial reality is also true of governments presiding over healthy economies. Some examples of going concerns that have been rolling their debt over for many years are ExxonMobil, the last three plus next three generations of a typical family, and the USA’s federal government.

A large number of Republicans, Democrats, and independents alike have experience managing private-sector businesses (although an even larger number do not). The ones who do have it can more-easily understand that the true “burden” of debt in a healthy, going concern is the affordability of the interest obligations; debt rollover makes paying down the principal a moot point. The cost of capital is almost always reduced when a mix of debt and equity is employed to finance a firm, and maintaining a constant mix in a growing firm requires an ever-increasing level of debt (...the opposite of “paying down” the debt). ExxonMobil and General Electric have been rolling their debt over for years. A typical multi-generation family rolls their outstanding debts for automobiles and houses into the future; as the older generation pays off its house and car loans, the younger ones take out new loans. The USA has a similar track record; meeting its interest payments with tax receipts and rolling its principal over in the world financial markets have not been problems, are not now problems, and—provided we get the economy back on track—will not become problems.

Those with business experience can more easily understand that the highest priority problem is to get the economy growing again—among other things, to maintain or improve our ability to afford the interest payments. But those without business experience (or those who forgot it) can be expected to continue barking up the wrong tree, insisting on “paying down the debt.” In any case, a healthy economy with robust growth is the root solution to just about every fiscal and monetary issue being debated today: unemployment, the debt ceiling, the deficit, the defense budget, the nondefense budget, unfunded liabilities, paying the interest, and rolling the debt over. If the economy were growing at a clip of 4.5% or more, none of those would be viewed as a major problem.

What a difference a healthy economy makes. Good thing we have some extra runway buying us time to get back to that condition.

Comments

[David Lee]

Hello Steve,

You used 4.5% as a desirable benchmark for growth. When was the last time we saw that kind of sustained growth that wasn't associated with a bubble (i.e. the dot-com bubble)?

[Optimist123]

It hasn't happened frequently; 3.5-4.0% has been there several times. I think the last time I saw 4.5% was in the out-year assumptions in Obama's 2010 budget proposal.

[Daniel Sellers]

Thanks for the update (I know I requested it not too long ago). My current worry is what happens to the ratios when interest rates go back up as the market recovers and people start moving money from safe Treasuries to my risky / higher return investments.

Example: What would the TIE ratio be if current 2-year notes went up to 4-5%? (Other bills/notes adjusted accordingly) This type of out year scenario scares me a bit. I watch Greece/Spain/Italy's Bond markets hoping that's not the way we go.

[Optimist123]

Interest rates going up might not be bad news, because many think they are a result of an improving economy. In other words, an improving economy means more people working and paying taxes, which would offset the effect of higher interest rates.