US government debt

Floyd Norris has a nice graphic which illustrates how the US national debt, at $7.2 trillion as on June 30, 2009, has grown by more than a third over the past year, as the US Government has borrowed massively to finance its financial and economic stimulus policies.



The graphic also shows how the outstanding debt of all the other economic actors - businesses, households and even state governments - has fallen off a cliff, leaving the US government to stand in for this collapse in private demand. The other relief amidst this spectacular explosion in national debt has been the historic low interest rates that have kept debt financing at very cheap levels.

During the current crisis, the government was forced into the role of a financial intermediary between the credit markets on the one side and the private financial institutions and businesses on the other. It borrowed on the behalf of the latter to bridge their liquidity squeeze, restore market confidence and spur aggregate demand.

The graphic also points to another indicator of the recent dominance of the financial services sector. While twenty years ago, non-financial businesses in the United States borrowed $1.70 for every dollar borrowed by the financial sector, government-guaranteed or not, the figure today is down to just 68 cents. Of concern is the fact that most of the debt incurred by the financial services sector was not based on any real economic activity, but from securitization and debt generated from derivative securities.

Update 1
Japan's massive public debt, touching 200% of its GDP, and bloated by the stimulus spending during the current recession has raised fears of a sovereign debt default and massive debt sell-offs.



However, Japan is rich in personal savings and assets, and less than 10% of its debt is held by foreigners, compared to 46% of America's public debt. Further, half of Japan’s government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest, effectively meaning that the government is just borrowing from one pocket and putting it in the other.

Finally, as Paul Krugman writes, Japan has the lowest long term bond yields, a bell-weather of inflationary pressures and debt default risks, among all major economies, and if anythin pointing to a long period of deflation.

Update 2
Paul Krugman puts the US public debt in perspective and argues that its public debt as a share of GDP has not reached unsustainable levels.



Larry Summers feels that even with the big recent increase in government debt, the total amount of debt generated by the United States economy has not been growing especially fast and that the total level of borrowing in US economy is actually lower than in normal times, not higher. David Leonhardt claims that the declines in private borrowings may have partially off-set the increase in government borrowings.

Update 3

Obama's Bush inheritance will be felt for many years to come



Update 4
Excellent editorial in the Times that examines the issue of burgeoning US government deficits and traces it to the Bush era profligacies and the recession.

Update 5
Menzie Chinn finds that the US public debt ratio and budget imbalance might not be as bad in comparison with other major developed economies.