Surprise! Uncle Sam’s Debt Has Stabilized. For Now
On Thursday, the government will release its first report on Q2 GDP. The economy didn’t do very well in Q1, but if this report is a good one, then there’s a very good chance that this will signal that Uncle Sam finally has his debt under control—at least in the near-term.
I don’t want to overstate what’s happening, so let’s look at the facts. In April, the CBO said that this year’s budget deficit is projected to be “only” $492 billion. Of course, that’s a huge deficit, but it’s a vast improvement over the red ink we’ve seen in previous years.
In fact, according to CBO, this year’s deficit is projected to be 2.8% of GDP. Assuming nominal GDP growth exceeds that—and we’ll find out a little bit on Wednesday—that means that our debt situation has stabilized.
Specifically, the metric I’m referring to is total federal debt held by the public as a percent of GDP. It’s likely that this number will stay around 75%, give or take, for the next few years. This is quite a different story from the claims of our out-of-control debt.
Make no mistake. We still have a debt problem, but that’s on the long-term. Just this week, the CBO released a scare report. But for the short-term, our debt isn’t growing.
Let’s refer to my world-famous rule on government deficits. Take the unemployment rate, multiply it by two, then subtract 10. That’s gives us a good indication as to the deficit as a percent of GDP figure. The current unemployment rate is 6.1% which translates to a deficit of 2.2% of GDP, so the CBO is pretty close to our projection.
Here’s the debt and GDP data for some recent quarters.
Eddy Elfenbein is a Washington, DC-based speaker, portfolio manager and editor of the blog Crossing Wall Street. His