Tuesday, November 29, 2016

The Public Debt - GDP Growth Gap

Despite the fact that economic growth levels are starting to tail off, when we look at economic growth since 2000 on a nominal dollar year-over-year basis, the economy looks like it’s expanding at somewhat reasonable rates as shown here:

Let's look at the basic formula for calculating GDP:

Y = C + I + E + G



C = Consumer Spending

I = Industry Investments

E = Excess of Imports over Exports

G = Government Spending

As a very significant portion of overall government spending is funded by the federal government and, since government spending includes the accumulation of public debt, government debt is a component of GDP.  

Over the period from 2000 to the present, here is what has happened to the year-over-year accumulation of federal government debt:

Now, let's look at the bottom line.  How does the accumulation of federal government debt compare to GDP growth on a dollar basis?  Here's the answer:

It's interesting to see how the growth in federal government debt far outstripped growth in GDP, particularly since 2008.  It is also interesting to observe that GDP grew faster than the federal debt until the Great Recession, in fact, if we go back in time to the mid-1960s, this has pretty much been the case except for very short periods during the 1991 and 2001 recessions:

We do live in unique times!

If we look at the actual numbers, here is what we find.  According to the U.S. Treasury, the total public debt outstanding was $9.229 trillion on January 1, 2008, rising to $19.573 trillion on September 30, 2016, a gain of $10.344 trillion.  By way of comparison, at the end of Q4 2007, nominal GDP was $14.685 trillion, rising to $18.651 trillion at the end of Q3 2016 for a net gain of $3.966 trillion.  In other words, the federal public debt increased 2.6 times faster than GDP growth since President Obama took office in 2008, resulting in a public debt-to-GDP growth gap of $6.378 trillion.   

Donald Trump's trillion dollar infrastructure plan looks interesting on paper, particularly since much of the U.S. infrastructure has been ignored for decades.  That said, such plans create a situation where Corporate America becomes dependent on ever-rising government investments (accompanied by ever-rising debt issuance) as a business model.  With the federal debt rapidly approaching the $20 trillion mark, it's obvious that Washington thinks nothing about continuing to mortgage the future for the present and is creating an situation where we are continuously eating tomorrow's dinner today.  


  1. So why do we continue to elect these people time, and time again?

  2. I think your math may be off. Debt increased about $1.2T/year from 2008 level. Average nominal GDP 2008-16 looks like about $2T/year above 2008 level? So total nominal GDP 2008-2016 added to economy over 8 years would be roughly $16B.
    However if you adjust annual GDP growth for inflation ( real not reported) then subtract how much of growth is from debt spending (1.2T /year ? ) the picture is still ugly. Even worse when you consider the lies embedded in the government's numbers and the Fed's artificially suppressed interest payments on the debt.
    Thanks for the analysis. I agree we are in trouble and sadly are headed for the cliff.

  3. 1.What about private debt!
    2.The 2008 crises could have been arrested by spending but they did nothing! it was too little too late
    3 Up until 2008 private sector credit expansion was driving the economy, once that collapsed because of Lieman’s whatever, the obvious thing to do would be to stop taking money out of pay checks of people that are working for a living, so they can make their payments’ out of income instead of debt