I agree that Eugene Steuerle's "Fiscal Democracy Index offers a chilling new perspective on the declining state of federal finances. Like Andrew Samwick, I too hadn't realized that 2009 was the first year in which all Federal revenues were consumed by promises made in the past -- entitlement programs and interest on the debt. All discretionary programs, the ones that Congress has to vote to fund each year, were paid with borrowed money.
Here are some other factoids that I only recently learned, courtesy of Fitch Ratings (see attachment at bottom of this post), which warned earlier this month that the United States' AAA rating could be at risk if don't make some sort of fiscal headway in the next three to five years.
Point One: We often hear that the US government debt load is lower as a share of GDP than those of many other large, wealthy nations, including Japan, Germany, the UK and France. But a more apples-to-apples comparison, which combines federal, state and local government borrowing, suggests that the US is in worse shape than most other AAA-rated countries.
By that measure, the United States general government debt totalled 78.6 percent of GDP in 2009 and will hit 90 percent by the end of 2010, Fitch says. That would make us the the most highly leveraged of all AAA-rated countries -- Germany, France, the UK, you name it. (Japan's debt is still much higher, but it lost AAA status back in the late 90's.)
Point Two: the picture is even grimmer if you look at US government borrowing as a share of revenues. US goverment debt (federal, state and local) was 330 303 percent of revenues in 2009 -- the highest ratio of any AAA country. And that 330 303 percent doesn't include additional trillions of dollars in new "contingent liabilities" -- bank guarantees, federally insured mortgage-backed securities, and so on.
Point Three (Fitch's point, not mine): You cannot fix the long-term problems through spending alone. US tax revenues are far lower, 25.9 percent of GDP, than the tax share of most other AAA countries. The median AAA-rated country had combined tax revenues equal to 43.6 percent of GDP over the past ten years.
"The expenditure side of the budget is also unlikely to prove a major source of additional consolidation. Government spending is low by international standards and both defence and non‐defence discretionary spending as a percentage of GDP are already projected to fall sharply... "
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Current account -- foreign debt -- net interest payments
Ed,
The US has been running a huge current account deficit for a long time. One hears that we are the world's largest debtor nation ($2.4 trillion in 2002 according to http://www.dollarsandsense.org/archives/2004/0304dollar.html). But we also receive more interest income than we pay.
How is that possible? Is this a bug in the accounting system?
Where are these numbers coming from? Are all asset transactions with foreigners reported? Is all interest paid to foreigners reported?
Care to comment?
Ed, I'm not sure why state &
Ed,
I'm not sure why state & municipal debt should matter. If CA defaults, sure that would be a problem, but it's not the Federal Government's problem. Would this be because Fitch expects the U.S. government to step in and bail out failed states & cities? While the stimulus sent money to states to help keep them operating, more recently the Federal Government rejected CA's plea for fiscal assistance. State and local budget shortfalls are certainly risk factors to take note of, but for purposes of evaluating sovereign credit risk the primary focus should be on explicit debt. Implicit debt can always be reneged on.
http://www.reuters.com/article/idUSTRE55F5VK20090616
The point about revenues being a low share of GDP in the USA is encouraging, if only for the reason that it would be mathematically possible to fix our fiscal position (whether we will is another story, of course). Nations already taxing 40%-50% of GDP will not be able to resort to further taxation to solve their problems.
Iain,
If I recall correctly, we receive net foreign receipts despite a negative net investment position because we invest in higher yielding assets. I don't know the actual numbers, but as a stylized example, if we own $8 trillion of foreign securities paying 5% and foreigners own $10 trillion in American securities paying 3%, we end up paying $30 billion/yr and receive $40 billion/yr, netting $10 billion.
Apparently Europeans are stupid investors
Justin,
This Federal Reserve paper agrees with you:
http://www.federalreserve.gov/pubs/ifdp/2009/977/ifdp977.pdf
More interestingly, it pinpoints the reason US claims outperform US liabilities: European investors engaged in active trading consistently screw up, and their losses are so large it covers the entire net external debt service.
Thanks, guys!
Here is my inference: the European position in US debt and equities is not scaling up with the increasing US external debt, because that increasing debt is driven by imports from oil exporters (OPEC?) and Asian widget manufacturers. These latter holdings do not underperform US claims, so as they scale up our interest payments abroad will scale with them.
I haven't yet found a series with US net return on investments over time. I did read somewhere that it is largely flat, which would contradict my prediction above.
Actual relative holdings
http://www.federalreserve.gov/pubs/ifdp/2007/910/ifdp910.pdf
"As of end-December 2006, U.S. residents held about $5.6 trillion in foreign stocks and bonds, compared with holdings of $2.1 trillion five years earlier, while foreign residents held about $8 trillion in U.S. long-term securities, more than double their holdings in 2001."
Interestingly, foreign short positions in US assets are not surveyed, and there is a lot of residual error between the survey results and what one would expect from tracking transactions.
I'll grant that I'm a not an
I'll grant that I'm a not an economist, but as I understand it household financial balance + business financial balance + government financial balance + foreign financial balance must = 0.
As states have no levers at the fed I can't see how their debt affects this.
On the other hand as consumers are already busted if the government decides to look at itself as busted and take a run at the deficit it can't expropriate all those foreign owned treasuries. This leaves business as the only piggy bank to raid until consumers have a pulse again or income to tax. How is this wrong?