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PostPosted: 12/20/09 4:26 am • # 1 
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Well, this doesn't sound too promising to me. But then, I don't count the economy as one of my strong points. For that matter, I don't count on any member of any government I've experienced in my lifetime to have the economy as its strong point. We've been drilling and shoveling our way back into the dark ages for decades. A trillion here, a trillion there.....

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What's the total debt-to-GDP ratio for the US?Wednesday, January 14, 2009, 5:38 pm, by cmartenson
In response to yesterday's post, titled The crisis explained in one chart: Debt-to-GDP, Lisa G did her homework and then asked a great question:

This debt/GDP % of 403% from 2+ years ago compares to the % in today's post of "340 percent of total GDP. "

Are these calculated differently or has the percentage actually dropped from 2006?

Any help here? I am getting lost.

Kudos for doing the research and resisting the call to become 'a believer'! Well done. There's a perfectly good explanation for all this....

[See the postscript for my take on this.]

The difference you have surfaced can be explained by what is tossed into the bucket called "debt" and what is, somewhat conveniently, left out.

The 340% cited in the figure yesterday refers to everything that the Federal Reserve collects and calls debt in its Z.1 Flow of Funds report (I focus on the "Level Tables"). This is actual, hard debt that consists of a contractual, legal obligation to repay. That is what I, very conservatively as it turns out, use to compare against GDP.

In the Z.1 report, the total government debt recorded by the Fed, even as late as December 2008, is 'only' $5.80 trillion. That's because the Fed does not include the debt the government "owes itself" (think about that concept for a minute....), nor does it include any of the outstanding entitlement liabilities of the federal government.

The 400+% Debt-To-GDP ratio that I quoted (waaaay) back in 2006 refers to just the federal government position when one includes both the debt the government owes to itself plus the entitlement liabilities of Social Security and Medicare/caid. These are not counted by the Fed in the Flow of Funds report because, technically, these are not debts. They are a liability of the US government, but not a contractual, legal obligation so they are not counted as debts.

We are barely talking about the same things in these two examples. The 340% figure is all credit market debt as counted by the Federal Reserve of which barely 10% of the total is assigned to the federal government. The 400+% figure is purely the federal government position when one counts all their liabilities.

If this all seems confusing, well, that's the purpose of slight of hand maneuvers.

Now, we all know that the US government has a straight debt obligation of slightly more than $10 trillion.

But that's nothing compared to the entitlement liabilities fo the US which the Treasury department is kind enough to post in the US annual report every year for those who care to see it.

The blue circle reveals that when we only consider entitlement underfunding, the US government is short some $49 trillion dollars. Meaning that if the US government wanted to be even on the whole deal, they would have to come up with $49 trillion, in cash, today to make it all work out.

The $4.073 trillion figure in the red circle shows that the size of the Net Present Value of the liability grew by some 28% of the total value of our (Fuzzy Number) GDP.

The red arrow indicates one more way to assess the severity of the situation. If the entitlement shortfall is some 4 times larger than the economy and it is increasing by nearly 5% per year. Then for the entitlement shortfall to remain in proportion to economic growth, the US GDP would have to be increasing at nearly 20% per year.

Sorry folks, that's just flat out impossible. The main reason I refer to the US as "insolvent" is because that's what it is. This data proves it beyond any shadow of a doubt. Any solutions by this next administration, or any to follow, must start with this simple conclusion or risk being tagged as a "deck chair rearranger" by future historians.

Why are the entitlement shortfalls not included in the Fed's survey of total credit market debt? Because Congress can modify the rules for the entitlement programs at any time and say "Sorry, no payments!", so technically they are not debts.

I counted and included the entitlement liabilities in my 2006 article because I reasoned that whether the federal government dutifully paid them off or they reneged on them, either way they behave like debt.

If the federal government does pay them off, then they will behave exactly like debt.

If the federal government doesn't 't pay, then the burden of meeting the accrued liability would revert to citizens who would then have to curtail other spending to make up for these shortfalls in their retirement and health care accounts.

Either way, whether the payments are made or reneged upon, they represent a drain on future spending/purchasing power which is a very workable definition of debt.

By the way, under this set of definitions, if we add the entitlement "debts" to the Fed's Z.1 definition of debt, then our Debt-To-GDP calculation vaults to a stunning, unpayable ratio of 680%.

Where this places the US relative to other countries is more of an academic than a practical consideration to me, although it might be a useful categorization for short to medium term currency trading. But eventually? Does it really matter if the US is 2.5 times vs. 'only' 1.2 times more insolvent than some other country? Nearly all western countries have been playing the same game by the same rules.

The few who remain solvent tend to be sparsely populated and resource rich. Exactly where the US was back when it was solvent.

Best,
Chris

PS - I squirm uncomfortably at the use of the word "followers" and I doubt I will ever do otherwise. That's just how I am built. My entire focus is, and always has been, to nudge people towards thinking for themselves. I have had plenty of opportunities to play the guru role, and I have turned them all down, without exception. Each of us needs to think for ourselves and come to our own conclusions. If we don't, we' run the risk of using the same thought processes that got us into this mess.

http://www.chrismartenson.com/blog/whats-total-debt-gdp-ration-us/11673



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PostPosted: 12/20/09 6:15 am • # 2 
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this is what i call "junk accounting". they are bringing back future expenses without bringing back future revenues. it is complete bull(*it.

this would rather be like predicting how much your mortgage will cost you without predicting how much money you will make to cover it. by that equation, ALL of us are broke.

i suppose they feel justified in this in that SS payments are more difficult to get out of than mortgage payments. however, they are significantly easier to get out of than a persons taxes.


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PostPosted: 12/20/09 6:17 am • # 3 
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The $4.073 trillion figure in the red circle shows that the size of the Net Present Value of the liability grew by some 28% of the total value of our (Fuzzy Number) GDP.

The red arrow indicates one more way to assess the severity of the situation. If the entitlement shortfall is some 4 times larger than the economy and it is increasing by nearly 5% per year. Then for the entitlement shortfall to remain in proportion to economic growth, the US GDP would have to be increasing at nearly 20% per year.

the primary failure here is that GDP and tax revenue, although closely tied, are not directly related. it is possible to grow tax revenues much faster than GDP, as we did in the 90's, or much slower, as we did in the 00's. in addition, there is no mention of the fact that SS and medicare benefits might DECREASE.

i got into a heated argument with a guy on the other board who "demonstrated" that we would be bankrupt in 30 years based on projections. i told him that the only thing he demonstrated is that things are GOING to change. notice i am not saying they might change, or that they will probably change. they will have to. either MC costs will have to come down, benefits will have to come down, or taxes will have to go up.

but please, take my word for it, we will NOT be going bankrupt.


Last edited by macroscopic on 12/20/09 6:22 am, edited 1 time in total.

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PostPosted: 12/20/09 6:31 am • # 4 
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to summarize, debt to GDP is not totally meaningless, but it is not meaningful enough to predict anything other than necessary change.


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PostPosted: 12/20/09 10:23 am • # 5 
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Mac,

a perfect ilustration of what I was talking about the last time I got involved in a discussion on economics on here. To me, this stuff makes no sense. It becomes apparent, when one is wiling to exhibit ones utter ignorance of the subject that those who speak for the government, or the politicos on either side, know how to mix apples and oranges, lemons and grapes.

This little article sounds just as reasonable in predicting the most obvious end of life as we know it, and condemning every living human to abject poverty for all eternity, as all the others which predict either very dire consequences, or rosy pictures of recovery, profitablity, and lovely, almost utopian futures for "those who work hard and "believe."

What is to be gained from this public exhibit of my ignorance is this: I am not stupid. I am ignorant in this specific way (among others). I do not understand the terminology or the way numbers are used by economists. It is like having a doctor describe to me, step by painstaking step, a specific neurosurgical process. Or, to use a more familiar analogy, it's like listening to a flim-flam artist auto mechanic start tellinig you why the slight noise in your car is going to cost you $5000. in repairs, if he's lucky.

Now, mullitply me times millions of people who also do not understand anymore than I do. Add in the economic jargon that is created on an almost daily basis, all based on acronyms which mean something only to those who invented the damned things, and then those of you who DO understand economics can feel compassion for those of us who do not.

There are far more people like me than there are people like you. Those people like me are very easy to threaten and scare, to confuse and bamboozle. If we weren't enough of a hazard, you have to add in the newly ignorant, (Who knew not and knew not they knew not) who have been had by the superior likes of Bernie Madoff and ( I'm pretty sure) the current economic bs-ers in government. Is there something genetic (I don't mean for you to take this personally, Mac) connecting the ability to understand economics with the tendency to insanely throw random numbers and meaningless terms around so that nobody who speaks simple engllish can understand the process? Is it a warped sense of humor? A semi-religious calling? A special gift of mysticism, like "speaking in tongues?" I don't think I could learn this subject if I studied a lifetime. I have read book after article after lecture by some alleged experts (some of whom went to jail) and I just don't get it.

Glad you're here, but I really hate to tell you. I STILL don't get it. Image

Oh, and don't waste your time trying to explain. I promise you DENSA reigns when it comes to my ability to understand this subject. I only add this post so that those of you who do understand enough to genuinely criticise the alleged experts who warn us of impending doom, may have some understanding of, and therefore tolerance of, those who can be completely sincere in their joy or horror, depending upon which economics expert they may happen to read on a given day. lol

jd


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PostPosted: 12/20/09 11:21 am • # 6 
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Jeannie- if there was an angry tone to my replies, it is because i failed to hide it. i get frustrated by people like the guy in the OP, who probably know enough to tell you everything, yet insist on telling you one small sliver which fits their focus. there are a lot more flaws to the argument than i mentioned. for example, the spending growth he mentions is about double the historical average. he didn't state what period that +20% was measured over, but it was not over the past 10 years, and certainly not the past 20. also, without adjusting all of this stuff for inflation, this whole discussion is pretty much meaningless.

you know what REALLY irks me? is that fear is often used to drive through "reforms" that end up HURTING a lot of people. a good example would be what happened in Russia after Gorbacev. their "reform" efforts drove them into bankrupsy, as national assets were auctioned off for pennies to their worth. no rescue efforts could be made, because the government was no longer worth anything other than it's word. i am sure that there are a lot of Mr. Burns' rubbing their claws together at the prospect of buying up our PUBLIC wealth for nothing as the rest of the public panics about the doomsday "future" (which the gatekeepers are engendering through their Shock inDoctrination).

it is for these people, not you, that my anger is reserved. in fact, i am very grateful you posted this. you impress me greatly as a poster, and this thread was no exception.

if you really WANT to get it, let me know, and i will try. but again, the simplest way to put it is this:

this scenario for bankrupsy assumes that things will continue the way they have been, and that is IMPOSSIBLE. things will HAVE TO CHANGE. and they will change in unpredictable ways. i get kinda tired of the chartreaders at a certain point. trends break. period.


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PostPosted: 12/20/09 11:36 am • # 7 
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one last thing, Jeanne- without delving into this piece further, which i have no intention of doing, i think he is picking up on a hit piece done on Krugman's debt to GDP analysis (which i will find and post a link to). if so, he is comparing public debt to total debt (public plus private), which is obviously a problem. here is a chart which shows the public debt:

ImageChart showing government debt as a percentage of GDP by Curious Cat Investing Economics Blog, Creative Commons Attribution, data from OECD, March 2009.

it agrees with data that i reviewed about six months ago, so i trust it fairly well. from this, i would say Japan is screwed. we are actually not in very bad shape, comparitively speaking.


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PostPosted: 12/20/09 11:43 am • # 8 
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i actually went one better, Jeanne- i posted Krugman's RESPONSE to his critique. it is written in pretty plain language, so you can probably follow it, and it is short:

http://krugman.blogs.nyti...8/28/the-burden-of-debt/

two final things- first Krugman has better credentials than most of his critics. he won a Nobel for his work in the field of economics in 2008. and although he is a self described "liberal", he is also in FAVOR of sweatshops (describing them as preferable to unemployment), and opposed to such things as rent, price and wage controls (ie- minimum wage). in short, he is more of a free marketeer than most self described liberals will EVER be. yet conservatives rail on him in this instance because he thinks the government has an OBLIGATION to produce aggregate demand when people are NOT spending money.


Last edited by macroscopic on 12/20/09 11:46 am, edited 1 time in total.

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PostPosted: 12/20/09 11:49 am • # 9 
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one (more) last thing. i am no expert on this subject. i just like it and understand it fairly well.


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