Think About the Magnitude of the Federal Debt

I have been reviewing the 2011 US Budget compared to history.   http://www.gpoaccess.gov/usbudget/fy11/pdf/hist.pdf  I notice the federal debt as a percentage of GDP will be over 100% by the end of Obama's first term.  Federal debt at the end of fiscal 2012 is expected to be $16,312,026,000,000 compared to the 2009 balance of $11,853,142,000,000 the most recent year for which actual data is available.  The assumptions underlying this budget make the actual results likely to be significantly worse.

In its budget, the administration predicted that the overall economy, as measured by the gross domestic product, will shrink by 1.2 percent this year but will grow by a solid 3.2 percent in 2010. That growth would be followed by even stronger increases of 4 percent in 2011, 4.6 percent in 2012 and 4.2 percent in 2013.

By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators in February predicted that the GDP will fall by a larger 1.9 percent this year and then increase at weaker rates of 2.1 percent in 2010, 2.9 percent in 2011 and 2012 and 2.8 percent in 2013.

From Page 35 the total personal income tax collections in 2012 are projected to be $1,326,045,000,000 compared to 2009 collections of $915,308,000,000 an increase of 45% over the most recent actual data.  The corporate tax collections are projected to be $366,361,000,000. compared to 2009 of $138,229,000,000  an increase of 165%.  As you can see, in a forecasting model you can get very detached from any possible reality very quickly which is why I have always said I can make a budget say anything you want.  It is making the reality match the budget that is difficult.   Now, I am not aware of the underlying assumptions in the increased tax collections however,we know that Obama hates corporations and anyone who makes more than $250,000 and thus the increases projected may just be increased rates on the least desirable members of society.   That being corporations and rich people.  Or it could be we are all facing increased taxes of some sort  but we can hope that the big increases in corporate collections will be absorbed and not passed on to the consumer.  Uh huh and what other fairy tales do you believe in?    It seems that in the end, there is only one taxpayer and that is the citizen who consumes products or services without the motivation to pass them on to another at a profit.  Woops, there was another very bad word "profit".   Other than that everyone else is a conduit of products and services intended for the consumer.   Thus if you buy that idea then the increases will be born by consumers one way or the other. 

Moving on to page 59 there is something in the budget called net interest which in 2009 is $186,902,000,000 as compared to a 2012 estimate of $342,857,000,000 an increase of 83%.   As a percentage of total debt, the net interest cost on the 2009 budget was 1.58% and in 2012 is projected to be 2.1%.  This is the average interest rate the federal government is paying on the national debt. 

So what am I driving at here?  Well, we have had some artificially low interest rates the past year or two while the fed has tried to prop up this financial system and the government has been a primary beneficiary of this.  During the past 18 months business has been shut out of the debt markets and all debt has been available to the US government at rates that have approached zero.   At some point business will theoretically be able to borrow money again and compete with government for what should be a limited amount of capital and the rates will increase dramatically from today.  With the rosy underlying assumptions in this budget, I would think that by 2012, the end of Obama's first and hopefully only term, the rates would increase substantially if things are as much better as he says they will be.  So lets assume that the only flaw in this budget is the rate of interest on the national debt.   And for argument sake lets guess the rate at that time would be 8% which I think is conservatively possible whether the economy is better or not due to the fact that at some point the fed has to stop monetizing the debt and other sources will dry up due to a down grade of the US Government as a borrower. This according to Moodys on February 3, 2010 " The credit ratings agency cautioned that if the US were to grow at slower pace levels than expected, the largest economy in the world’s already-extended finances could be over-stretched, in turn damaging its AAA credit rating."  http://www.telegraph.co.uk/finance/economics/7153180/US-credit-rating-at-risk-Moodys-warns.html So in any case the rates have to increase whether the economy is better or not.    If the 2012 net interest was 8% then our total interest that year would be $1,304,962,080,000 which is almost exactly the amount of total personal income tax collections projected for 2012 of $1,326,045,000,000.   A number that is 45% higher than actual 2009 receipts.   And if the economy didn't improve or taxes increase and total combined corporate and personal tax collections remained at their 2009 levels of  $1,053,537,000,000 (915,308,000,000 + 138,229,000,000) then the total combined personal and corporate tax collections would cover only 81% of the interest on the debt.  At our current spending rate and tax rates, in two years the total income tax collections more than likely will not even cover the interest on the debt.   And that seems to me like the the entire government basically has to run on borrowed money at that time.   Tell me how that works.