US Public Debt, Summary

Welcome to your life
There's no turning back
Even while we sleep
We will find you
--Tears for Fears

In previous posts we observed patterns in US Public Debt from 1790-1900, 1900-1980, and 1970-2009. Generally, it appears that the first period could be labelled as one of prudence or frugality when it came to debt management, while the middle period was one of exorbitance. The last period? Well, you label it.

We noted last time that although Public Debt and nominal GDP generally share similar exponential growth patterns over the 1790-2009 period, that Public Debt has been growing about 3x as fast.

Another way to examine this relationship is directly compare Public Debt to GDP. When we do this, we obtain a measure of leverage--the higher the ratio, the greater the leverage.

Above we see US Public Debt as a percentage of nominal GDP from 1790 till 2009. Before diving into the graph, let me first note that obtaining authoratative US GDP numbers for the entire period is impossible, because no one tracked it prior to the 1930s. Reconstructing pre 1930 GDP has literally become an academic exercise. The source I'm using is here. Their reconstruction method seems reasonable.

Now, what can we observe from the graph? As noted in previous analyses, Public Debt as a % of GDP always spikes during war time (we 'lever up' for war) but then recedes back toward previous levels. The 1800's were a period of relatively low leverage. In fact, prior to the Civil War, leverage was negligible for many decades.

Things changed in the 20th century. For the first time, leverage increased during a non war period (1930s). A similar pattern took hold in the late 70s/early 80s.

As of 2009, Public Debt level exceeded 80% of GDP--a level unmatched in peace time. The only time our country has been this leveraged was during WWII.

At the beginning of our study we suggested Public Debt as a useful measure of fiscal responsibility of the US Federal government. Our analysis casts little doubt that debt management practices have changed over the past 200+ years. After what appeared to be a general distaste for leverage during the 1800s, the Federal government 'levered up' during the 20th century.

Currently, our degree of leverage suggests that we're taking an historic amount risk. A simple definition of risk, btw, is potential for loss.

Of course, there's a general relationship between risk and reward. Perhaps increased leverage helps explain the big increases in our standard of living during the 20th century. (Personally, I have little doubt it helps explain large leaps in asset prices of most types).

But high levels of leverage means that there's more debt to pay back. And at some point, the debt load becomes unmanageable.

While no one knows exactly what that point is, it is hard to argue that risk has not been going up.

One final note: we've been focusing on Public Debt. There's also private debt (debt held by private sector individuals and entities--which is at least the size of public debt). Then there are unfunded future liabilities such as Medicare, Medicaid, Social Security, the New Health Care. Factor these in and you get a picture of leverage that is many multiples of GDP.