US Public Debt, 1970-2009

If we took a holiday
Some time to celebrate
Just one day out of life
It would be, it would be so nice
--Madonna

Previously we observed patterns in US Public Debt in the 1790-1900 and 1900-1980 periods. Today we look at the recent period from 1970 through 2009.

The chart indicates the exponential growth pattern that we observe in so many series during this period (stocks, real estate, etc). The sheer size of Public Debt increase is breathtaking--from about $400 billion in 1970 to approximately $ 12 trillion in 2009--a thirty fold increase.

Note the inflection point in the 2001-2002 area. Since then the slope steepens.

Keep in mind that this period saw massive world change--globalization, technology, etc. Despite the improvements that improved resource efficiency, debt load of the US Federal government increased thirty fold.

If we take a step back and look at the entire 1970-2009 period, the rocket ship rise in Public Debt in the past few decades overwhelms most of the earlier patterns in the data.

Some folks would argue that the geometric pattern observed above is merely a function of compounding at a low growth rate over time.

Here we see nominal US GDP over the same 1790 to 2009 time period. Like Public Debt, nominal GDP shows a similar exponential growth pattern. It turns out that the average annual change in nominal US GDP has been +5.6% during this period.

If we take the estimated US GDP in 1790, which was ~$200 million (!), and compound it at 5.6% annually for 219 periods, we get the above pattern--which is very similar to actual US GDP growth over 220 years.

So, perhaps this entire exercise is much ado about nothing. Public Debt is growing exponentially because general economic activity is growing exponentially. This argument seems problematic, however. Why should debt necessarily rise hand in hand with economic activity? As economies become more productive, isn't it reasonable to expect less borrowing to generate a particular standard of living? A wealthier people have more resources to allocate toward present day consumption without incurring debt.

Moreover, we have already observed that, during the first century of post Constitution US history, there were significant periods where Public Debt was flat or decreasing despite economic growth.

We should also not that the similar patterns in Public Debt and GDP appearing above mask differences in the underlying annual growth rates of these two series. While nominal GDP has been growing about 5.6% annually for the past 220 years, Public Debt has been growing at 17.4% annually--over 3 times as fast.

It takes no genius to understand that debt cannot grow 3x faster than income perpetually--and the consequences of doing so for an extended period of time are likely not to be good.

In a final missive, we'll compare Public Debt to nominal GDP growth directly, and wrap this study up.