The US deficit is up $590 billion so one might think total US debt would rise by that amount or at least something close to that amount.
Instead, total US debt for the fiscal year that just closed soared by over $1.2 trillion. What’s going on?
The shortest answer is “deficit lies”. The longer answer involves numerous off budget items like social security do not count towards the deficit but do count towards debt.
Lacy Hunt covered this topic in detail in the Hoisington Management Quarterly Review and Outlook Third Quarter 2016 (following snips via email).
From 1956 until the mid-1980s, the change in gross federal debt was always very close to the deficit (Chart 1). However, over the past thirty years the change in debt has exceeded the deficit in 27 of those years, which served to conceal the degree to which the federal fiscal situation has actually deteriorated. The extremely large deviation between the deficit and debt in 2016 illustrates the complex nature of the government accounting.
To better understand why there is a gap between the increase in the deficit with the change in gross federal debt, we examine a recently available breakdown and analysis of data on the federal budget deficit from Louis Crandall of Wrightson ICAP, which consists of the year-over-year change ending June 30, 2016.
The increase in debt for that period was over $1.2 trillion while the deficit was $524 billion, a near $700 billion difference. The discrepancy between these two can be broken down as follows (Table 1): (a) $109 billion (line 2) was due to the change in the treasury cash balance, a common and well understood variable item; (b) $270 billion (line 3) reflects various accounting gimmicks used in fiscal 2015 to limit the size of debt in order to postpone hitting the Debt Limit. Thus, debt was artificially suppressed relative to the deficit in 2015, and the $270 billion in line 3 is merely a reversal of those transactions, a one-off, non-recurring event; (c) $93 billion (line 4) was borrowed by the treasury to make student loans, and this is where it gets interesting. Student loans are considered an investment and therefore are not included in the deficit calculation. Nevertheless, money has to be borrowed to fund the loans, and total debt rises; (d) In the same vein, $70 billion (line 5) was money borrowed by the treasury to increase spending on highways and mass transit. It is not included in the deficit calculation even though the debt increases; (e) $75 billion (line 6) was borrowed because payments to Social Security, Medicare and Affordable Care Act recipients along with the government’s civilian and military retirees were greater during this time frame than the FICA and other tax collections, a demographic development destined to get worse; (f) Finally, the residual $82 billion (line 9) is made up of various unidentifiable expenditures including “funny money securities stuffed in various trust funds”.
As noted, these last four items discussed above (lines 4, 5, 6 and 9), which total $320 billion, fund activities and raise debt, but they are not in the deficit. Instead they are categorized as something else. Under the principles of economics, they are in fact cash expenditures that raise federal debt.
In the past ten years, the cumulative budget deficit was “only” $7.9 trillion, but the increase in debt was $10.9 trillion, a 38% difference. Using the same math, by 2025 the debt increase will be in the neighborhood of $13 trillion, based on the $9.2 trillion deficit increase projected by the CBO.
Textbooks Versus Reality
Textbooks have historically hypothesized that government expenditures lift economic growth by some multiple of every dollar spent through a positive government expenditure multiplier. As such, deficit spending has long been considered to be a positive for economic expansion. If the expansion lasts long and generates faster actual and expected inflation, bond yields should rise via Irving Fisher’s equation (Theory of Interest, 1930).
Impressive scholarly research has demonstrated that the government spending multiplier is in fact negative, meaning that a dollar of deficit spending slows economic output. The fundamental rationale is that the government has to withdraw funds, via taxes or borrowing, from the private sector, to spend their dollars.
Decelerating Economic Growth
From a fiscal and Keynesian perspective, 2016 should have been a year of accelerating economic activity. There was no crisis in passing the 2016 budget. There was a nonpartisan deal to accelerate military and civilian spending as well as a deal to hike outlays for highways. The increased expenditures and debt were going to occur after two years of slower growth in nominal GDP, which according to its advocates meant that the timing was right. Nevertheless, the economy sputtered. This once again confirms the existence of a negative government spending multiplier.
A $1.4 trillion jump in federal debt was paired with both weaker economic growth and falling treasury yields. Unfortunately, the 2017 economic horizon is clouded by the rising likelihood of further increases in government spending and debt. The inevitable result will be slower economic growth and declining interest rates, a pattern similar to the 2016 experience.
Van R. Hoisington
Lacy H. Hunt, Ph.D.
Fiscal Stimulus Theory and Reality
There you have it: the short explanation (lies), as well as the lie details.
In case you missed it, please note Treasury Receipts Up 1%, Spending Up 5%.
This already sorry state of affairs will get very ugly when recession hits.
Addendum: Note From Lacy Hunt
The first paragraph of the Hoisington quarterly report showed debt rising $1.4 trillion but the detail showed $1.2 trillion. I asked Lacy about the discrepancy and he pinged me back with this email …
The increase was $1.4 trillion for official fiscal year, but for the 12 months ending June 30 when we did the reconciliation the increase was $1.2 trillion.
Mike “Mish” Shedlock
Facts that are always ignored by politicians running for office because they know voters could not care less. When have voters suffered any consequences of federal government deficits and debt? At least consequences they are aware of?
The only times politicians have suffered any consequences related to the deficit and debt have been when they attempted to stop borrowing at the alleged “ceiling” and call for a balanced budget.
Everyone knows it is nothing more than political games and demonstrates why Janet Yellen is the most powerful person on earth. She stops printing and the world stops turning.
Correction. She stops printing and gets replaced.
Excellent information; thank you Mish.
Andrew Anderson said:
The problem isn’t Federal Debt but that it pays positive interest – welfare proportional to wealth, not need.
I agree. Only when the need is deadly serious does government tell the bankers and the oligarchs to pound sand and directly pays its bills with greenbacks paying zero interest. Lincoln did this after the Civil War. It worked. The bond vigilantes? They pounded sand like they always do. Always will.
The error is letting banks create oceans of new credit money by lending against speculative financial assets instead of lending to entrepreneurs. These credit driven asset bubbles invariably pop and government predictably saves the bankers by printing. This is better than government not printing (and borrowing) to save the payment system but it would be way better if government prevented bankers from blowing speculative credit bubbles in the first place.
Andrew Anderson said:
“Loans create deposits” but only largely sham liabilities wrt the general population due to extensive privileges* for depository institutions.
I suggest we make those largely sham liabilities wrt the general population real liabilities if we’re interested in justice and stability.
*E.g. government provided deposit insurance instead of a Postal Savings Service or equivalent.
Lending to entrepreneurs that open factories in the 3rd world won’t do much for growth – in America. It has done wonders for the NICs. They feel the multiplier love.
Stuki Moi said:
Printing never has been, nor ever will be, “better than government not printing.” Printing is nothing bu straight up theft. Hence “theft” can be substituted wholesale for “printing” in any context related to economics. And I assume there is fairly widespread agreement that government stealing is not “better than government not stealing.”.
Neither did Moses ever come stumbling down from Sinai with law stating that payment mediation had to be done by the same legal entity as one specializing in run amuck, zero credit standard lending.
Let individual actors sort out payment mediation by choosing, themselves, who they feel comfortable mediating their payments. Fat chance they’ll pick a bunch of half literate yahoos, who never saw a bubble they didn’t think was “diiiferent thiiiiis tiiiime”, unless those yahoos had some implicit agreement with Leviathan, that the latter would rob all others on their behalf, to keep them in guaranteed splendor despite their inability to, themselves, do anything useful at all.
Andrew Anderson said:
Printing is nothing bu straight up theft. Stuki Moi
Inexpensive fiat is the ONLY ethical money form for government use since the taxation authority and power of government should not be used to enhance the value of, for example, someone’s favorite shiny metal.
Then should we have a fixed supply of inexpensive fiat? No since that robs the young via deflation as the population grows but the supply of fiat does not.
That said, it is theft when the central bank creates fiat for the private sector, no argument there.
Stuki Moi said:
“That said, it is theft when the central bank creates fiat for the private sector, no argument there.”
But not when a quickly hand waved obfuscation by way of routing the loot through “The government” is done, right? a la Solyndra, defense contractors, overpriced cancer drugs etc…
The only ethical money, is money that requires no use of force. No jailing of people for choosing to use a different money. Nor for not “reporting” their use of money. Nor for doing their best to create some of their own (printing, alchemizing, hacking ( in the case of digital currency) ).
Sticking a gun in someone’s face demanding they do things your way, against their will, is not “ethical” behavior. The fact that you personally just don’t physically hold the gun, but instead sit around like some smarmy rat “legislating” that others must do so, makes exactly zero difference. Hence, no form of money that requires the powerful to do exactly that to those less fortunate, can possibly be ethical.
What’s ethical, is to have enough decency and respect for others, to leave them alone to do what they please, as long as they’re not directly and unquestionably threatening you. Me printing George Washington’s head on paper pieces, does not qualify as a direct threat to anyone, any more than Yellen’s doing so does.
Then, once the jackboots are out of the stiking guns in people’s faces and forcing them to beg for “their” money, let people, freely, uncoerced, choose what they care to use. For money , as for anything else. That’s ethical. Anything else is nothing more than yet another trite variation of “I have more guns than you, so I get to dictate what’s ethical, and if you object, I’ll make up a law and send you to Gitmo at gunpoint” progressive tyranny.
Andrew Anderson said:
The only ethical money, is money that requires no use of force.
Jesus had a word for people who used Caesar’s money (presumably for private profit) while protesting paying taxes to him – hypocrites. See Matthew 22:16-22.
And anarchy is neither stable nor Biblical – not since the Hebrews rejected God’s rulership for an earthy king instead in 1st Samuel.
John Doe 999 said:
Social Security is not welfare – it is money we have paid into, because the government said we can’t handle our own finances; but now they have spent the money they said we couldn’t handle.
The problem is the government now has at least 3 sets of books–modified cash flow which was the old cash flow which is increase in debt, and the third is Government GAAP accounting which is accrual.
Whats the difference? Well the differences between deficit and debt growth were not large until about 3 years ago. 1.5 trillion of difference the last 3 years–Obama.
the difference is what the Obama considers to be “investments–remember he started talking about “investments” 4-5 years ago? The govt ignores the”investments”, for the deficit.
Things like Solyndra, where money should never have been spent.
Solyndra has been out of the news for a while, but the record shows that their “investment” in Obama and in lobbying paid off handsomely for them. It’s just the same old Chicago style politics: “You scratch my back, I’ll scratch yours” (with other peoples money). Anywhere else it would be called a racket.
David A said:
Yes, and exactly zero investigation into where all the green energy gov money went.
Tony Bennett said:
The “official” US budget a joke.
Also not included: disaster relief, overseas military spending, Post Office cash flow (in theory could turn a PROFIT)
Tony Bennett said:
Of course, deficit number looks better courtesy of Federal Reserve.
The current Treasury monthly statement (september which concludes FY2016) reveals FR returned $115.672 billion in “profits” to US Treasury.
Look no further why Congress allows Yellen go unchecked.
If the general public were to awaken to how much “printing” has been done since closing the GOLD window in 1971 and how little their “paper savings” electronic digits are actually worth we would have a true SHTF situation. Like Henry Ford once said. There would be a revolution by the next morning. If you do not have GOLD, you should consider getting some, before everyone else wakes up.
I’m not sure I understand line 6, if the Treasury borrowed money to pay social security benefits then it should be accounted for by a dollar for dollar reduction in the amount the Treasury owes the SS “trust fund”, and therefore not have any impact on the overall debt.
Without a doubt, the SS Trust Fund is not included in the deficit.
I understand, I was wondering about the affect on the debt. If SS runs a $200B surplus, the reported annual deficit is reduced by that amount, but the total debt is increased by the same amount. That should work in reverse as well.
Tony Bennett said:
The social security and medicare trust funds are a mirage.
Click on any fund and you’ll notice the KEY operative word – “non-marketable”
Al Gore was right with his IOUs statement. Treasury takes employment tax and lumps it into general revenue and SPENDS IT. And Treasury has to issue debt NOW (and has been) to meet current obligations for Social Security and Medicare.
“Social Security’s total income is projected to exceed its total cost through 2019, as it has since 1982. The 2015 surplus of total income relative to cost was $23 billion. However, when interest income is excluded, Social Security’s cost is projected to exceed its non-interest income throughout the projection period, as it has since 2010. The Trustees project that this annual non-interest deficit will average about $69 billion between 2016 and 2019.”
OMNIBUS passing last year is why deficit spending will go back over $600 billion this year.
the pretend recovery marches on said:
slight of hand? u r kidding right?30-40 billion,that’s slight of hand,more than half a tril,that’s enronomics on roids.Gov’t center for propaganda n truth numbers were off by close to 700 billion (lol)
Michael Rudmin said:
Mish, the. headline has a typo that makes it misleading and makes it look like you don’t understand what you’re saying.
Shouldn’t you write, “deficit AT 520B”, as opposed to “UP 520 billin”?
That should have said AT not UU
It’s a good thing we’re not talking about REAL money here.
I also love the part where it says “Student Loans are considered an ‘investment’ and are therefore not included in the deficit calculation”.
An “investment” with a 30%+ delinquency rate.
Ron J said:
“There was a nonpartisan deal to accelerate military and civilian spending as well as a deal to hike outlays for highways.”
You scratch my political back and I’ll scratch your political back.
Win-Win. One party system. Little wonder that the election is being rigged against Trump, the system outsider, just as it was against Sanders.
Jon Sellers said:
“Impressive scholarly research has demonstrated that the government spending multiplier is in fact negative, meaning that a dollar of deficit spending slows economic output. The fundamental rationale is that the government has to withdraw funds, via taxes or borrowing, from the private sector, to spend their dollars.”
Idiocy. The government creates 100% of the funds BEFORE withdrawing them. The net is zero. If there is any reduction in the multiplier it is because of where the government is spending the money and whom it is taking it from.
But if you can’t comprehend the first part, you’ll never make it to the second.
Ron J said:
“Instead, total US debt for the fiscal year that just closed soared by over $1.2 trillion. What’s going on?”
Part of the huge-est financial fraud in the history of the world. We are also in the midst of the huge-est political fraud in the world.
Ron, Which fraud? Reagan claimed less government while being the biggest spending president of his time and tripling the national debt. GHW Bush was looking for a lip reader. WJC claimed a surplus after raiding Medicare and Social Security. GWB doubled the deficit and told everyone that running up their credit card was good for the economy. BHO has claimed economic revival while having deficits greater than economic growth for each of his budget years.
Ron J said:
“The economy gets weaker as the debt piles up, exactly the opposite of what Paul Krugman, Larry Summers, and all the central banks believe.”
PRETEND, is the operative word. Paul Krugman PRETENDS. They are all pretending.
Krugman learned the math in grade school. The equation always works out the same way. 1+1=2. 100% of bubbles burst and deflate. 100% of booms end in a bust. Inflation and deflation complete a cycle. A cycle always has 360 degrees, an up phase and a down phase. Amplitude is also part of a cycle. The bigger the up phase, the bigger the down phase. In colloquial terms, the bigger the boom, the bigger the bust.
We need to get used to the government supporting everything. Outside of an apocalypse, there won’t be a need for jobs for most people. It will get worse over time. The government will be forced to print up huge deficits and increasingly hand out welfare/make up unnecessary jobs to keep a calm populace. Our deficits will get progressively worse over time and not just in the US. It will happen globally.
Joseph Constable said:
In the private sector we take the income statement (government surplus or deficit) with the balance sheet and produce a cash flow statement.
The lefties say Bill Clinton didn’t produce a deficit. He had a negative cash flow of $1.4 trillion. Then Bush had a negative cash flow of $5.4 trillion. Then Obama a negative cash flow of $9.4 trillion so far.
So American morons, what sort of negative cash flow do you want the next president to produce? I think we will run up the debt even more and then attempt to default on it by inflation. And then by decree.
By the way, Bill Clinton’s Camelot II economy was a false and corrupt one that ended in Sarbanes Oxley and a crash.
Sam r said:
The social security trust fund is considered “intra government ” debt.. That is to say money that one branch of government owes to another. It is not included in the public debt numbers because it is an accounting entry more than anything else. Most articles on the matter get it wrong as do many politicians when they refer to the trust fund as having “cash balances.”
Now the trust fund has no impact on public debt outstanding so long as it is running structural annual cash surpluses.
But we know this is no longer the case and therefore SS will have three primary impacts on the deficit. The first relates to how surpluses have in the past been used. As we all know , the surplus cash is spent as part ofthe annual fiscal budget. When SS has a surplus it essentially reduces the amount of public debt that has to be issued.
When there are no surpluses, or they are minimal as is the case today, there is no net reduction in public debt issuance . Since spending has in no way been cut to address the fact that SS no longer runs structural surpluses, the amount of public debt issuance will go up. How big an impact have SS structural surpluses had in reducing the amount of accumulated public debt issuance? Well, the number is in the trillions!
Many articles equally get the facts wrong on the very nature of the trust fund by stating that the fund is backed by treasury notes or bonds. If only it were so. No, while the treasury does issue bonds they are not treasury bonds in the sense of being public debt instruments which represent real debt of the U.S. They are called “Special Purpose Obligation Bonds” and though issued by the Treasury, are just an accounting construct. Both OMB and the CBO have published white papers on the perils of federal trust fund accounting.
The second impact to the budget related to SS is that without structural surpluses , more real public debt has to be issued. This implies that interest on the public debt should be increasing. Sure enough, that is exactly what is occurring.
The third impact to the deficit occurs when you have to actually tap into the SS to revover dollars to pay for benefits. Since there is no actual money, it has to come from somewhere. And this somewhere in the absence of increased taxes, lower benefits and/or reduced spending has to come from the issuance of more real public debt. And that is what is now occurring.
The above illustrates 3 impacts to the federal budget all the result of what happens when SS no longer runs structural surpluses.
Brian E Considine (@e_considine) said:
Of course it isn’t a ‘trick’ if it works in the opposite direction. For example, borrowing $70B to make student loans is not counted as part of the deficit because that is accounted for as an ‘investment’ rather than spending. But the flip side would be that people making their student loan payments would not lower the deficit even though such payments would decrease Federal debt, so what works one way on the way up works the opposite way on the way down.
Regular accounting is like this too. When you buy a condo or home and rent it out it is an investment and every year you take a depreciation write off. For years you’ll report to the IRS that the place is generating a loss even though the renter’s payments to you each month are greater than your cash expenses. After it is fully depreciated, though, it’s all income and taxable for you.