Another Way To Analyze The National Debt

I recently thought of a new way to measure the burden of the national debt, though I’m sure I’m not the first. When we measure the national debt, we typically take either gross federal debt, or federal debt held by the public as a share of gross domestic product.

When we do that, we come up with a picture that looks like this:

As we can see, it shot up really in four places, 1930-1932 with the Great Depression, 1942 to 1945 with the Second World War, 1980 to 1995 with the War On Inflation, and finally 2009 to 2012 with the Great Recession. It fell in the times in between, with the exception of a few short periods where the debt was held in standstill.

It’s mildly similar to a debt to income ratio, though an it looks a little different when we use Federal revenue as the denominator instead of gross domestic product:

Though these are useful charts, especially the former, they are really not all that informative when it comes to the actual burden of the debt. Since U.S. government debt comes in the form of bonds, the government does not actually need to pay down the principal, just the bond yield to holders (interest). This means that at least when it comes to what the taxpayer has to pay, the level of debt is only of two primary factors.

Aside from some Federal Government’s debt being owed to itself directly or indirectly (whether through Trusts or Federal Reserve Banks), there are other reasons the sum of debt is not the only important indicator. Since, as I mentioned, the government’s cost of borrowing comes in the form of Treasury bond yields (or interest to debt holders), the rate of interest on outstanding Treasury bonds has as much to do as the sum of debt with the actual cost to taxpayers and the Federal Government.

If we subtract from gross federal debt the amounts held by Federal Trusts and Federal Reserve Banks, we get a graph that looks like this:

This is one of the primary components. Our current level of debt grew to 69% of GDP from 27%, the level it was the year I was born (2002). The next is the current mean rate of interest on government debt securities, which I computed by dividing by the net federal debt by net current federal interest outlays less Federal Reserve remittances. That graph looks like this:

Those are some terribly steep rates we experienced back in the 80’s and 90’s! Now see how that is reflected in the net cost of interest as a share of gross domestic product:

From this perspective, our current debt load doesn’t seem like a real issue, especially for those boomers out there who wish to return to the 1980’s and 90’s. I’ve modeled out how that will look over the next 30 years based mostly on Federal Reserve and Congressional Budget Office data and projections (though my model is unquestionably flawed and relies on many assumptions). Anyways, the graph for that looks like this:

Not quite reaching 1985-1995 levels in 2050, but one Paul Volcker-style War On Inflation from jetting well beyond them. In fact, it would only take Treasury rates like those in the early 2000’s to obliterate the national finances and send us straight to the depths of insolvency. Of course, that would never be allowed to happen because we’d just inflate away the debt and repress interest rates (thank God for monetary sovereignty).

I’d like to note that I’m not really a proponent of Modern Monetary Theory-esque policy (unless there’s no better option). From the end of the Second World War to about the mid-1960’s we had in effect a policy of financial repression, or in other words keeping rates of interest on public debt securities artificially low in order to make the sky-high war debt manageable. This policy is more in line with what I support, including the monetization of the debt in times of necessity (such as during this year’s pandemic-driven recession).

This wasn’t a very long piece, but I hope it provided a more useful way to analyze the burden of debt on our nation’s government, and on other governments as well. I’m just an eighteen year old college student, so if any of this writing of mine is worthwhile, please share it, I appreciate having an audience that enjoys my work.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s