The Perfect Fiscal Storm

Its brewing. Its inevitable. We are in the calm before a fiscal hurricane. Its the perfect storm… of economic conditions boiling to an inevitable outcome.

We should be preparing for the worst, running for the storm shelters. But instead, we bask on our economic front porch admiring the towering clouds.

The economic conditions fast coming together into harmonic resonance are:

  • Excessive growth of public debt
  • A long term weakened economy
  • Crushing growth of health care costs
  • A collective unwillingness to fix it

Inevitable disaster becomes obvious with only a casual glance at combined GDP and public debt figures from 1997-to-present; and, a casual glance at a CBO report.

The Forecaster’s Toolkit

Support data behind the economic clouds, brewing on our horizon, come from three main sources:

  1. Congressional Budget Office(CBO): 2011 Long Term Budget Outlook
  2. U.S. Bureau of Economic Analysis(BEA): Gross Domestic Product
  3. U.S. Treasury Department: Debt to the Penny

The CBO report provides the long-term economic outlook for the future.

The other two online tools allow the econo-forcaster to collect and review historical data over a range of dates as input to predict future behavior.

Data from Treasury and the BEA were used to compare GDP growth and public debt growth at the end of each fiscal year from 1997 to 2011.

1997 was chosen as the starting year because 2/3rds of all U.S. debt growth has happened since that time. All the pertinent data are available online.

A spreadsheet of annual summary information, with a legend explaining it, was made from Treasury and BEA data:

That spreadsheet was used to generate charts used in this article.

Cloud 1: Excessive Growth of Public Debt

Percent of Total Debt that is Public Debt

As any economist will tell you, the national debt itself is not a problem. It is the amount of it that is public debt that can become a problem.

Public debt is money owed by the government to outsiders, like China, that must be paid off with interest.

Back in 1997, as the Clinton economic boom began rising, a full 70% of our national debt was public debt owed to outsiders.

By 2001 that percentage had dropped dramatically to 57% and got as low as 56% by 2007.

In the last 4 years, though, the percentage of public debt has ballooned back up to near 1997 levels, to 68.5%.

Rising Percentage of Public to GDP Debt Growth

In 1997 public debt stood at $3.8 trillion. As of 9/30/2011 it stood at $10.1 trillion. Public debt is over 2.6 times greater today than it was in 1997.

Just since September 30th this year, public debt has grown by another $311 billion!

The graphic at right shows how most of the growth in the national debt has migrated almost exclusively into public debt growth.

Public debt is growing at an unparalleled rate.

Cloud 2: Excessive Growth of Public Debt

Fast rising debt-to-GDP ratio

Through 2007 the United States had a very, very enviable debt-to-GDP ratio.

The debt-to-GDP ratio is the all-important percentage of public debt compared to a country’s annual GDP.

In 2001 it was as low as 33%.

However, since 2007 it has more than doubled to 67.4% and is going up like a roman candle.

It is showing no signs of doing anything other than going strait up.

Economists tell us when the debt-to-GDP ratio rises above 85% that a country gets into economic trouble.

At its current rate of growth our debt-to-GDP ratio will be at 100% in 4-5 years.

Cloud 3: Excessive Growth of Public Debt

National Debt Growth Rate Percentage by Year

Generally speaking economists suggest if you keep the annual national debt growth rate under 3%, it is optimum for a country’s overall economic growth and prosperity. Get above and you can get into trouble.

The European Union has the 3% rule written into the eurozone’s monetary union agreement. Compliance is voluntary.

Greece and virtually every eurozone country has ignored the 3% rule and that is why Europe is in deep economic trouble today.

The recent EU agreement, made less than two weeks ago, is to add enforcement to the 3% rule in addition to building a bailout fund.

As we can see from 1997 to 2001 the United States government generally lived within the 3% GDP rule.

However, with tax cuts and two wars, GDP spending rose first to 8% by 2003; then it settled back down to below 6% when the housing bubble burst and the country sank into deep, deep recession.

Desperate times require desperate measures.

Government spending spiked at 16% of GDP in 2009 with President Obama’s “stimulus” and other spending measures to fight the Great Recession.

It has since dropped back down again to 8%, but that is still way to high.

It will not drop much more unless the economy gets a lot stronger, or taxes are drastically raised, or there are serious government spending cuts, or a combination. None of that looks likely at the moment.

Cloud 4: Excessive Growth of Public Debt

National debt growth out-of-control since 2001

Its revealing to compare the percentage of national debt growth and GDP growth since 1997.

Until 2001 the percent of public debt growth was less than GDP growth. That is ideal.

Since then, however, public debt growth has reversed itself with GDP growth. It went up first because of the Bush tax cuts to fight the 2001 recession and, of course, the two wars.

It was moving toward normalcy until the housing bubble burst and changed everything.

Public debt growth and GDP growth spiked in opposite directions in 2009. Public debt growth spiked because of President Obama’s bold attempt to fight the Great Recession.

They have started coming back together again, but you can see on the far right of the graph an unexpected and disturbing drop in GDP growth this year.


Newt Gingrich and Bill Clinton have long claimed to have “balanced the budget” during their terms. Though technically true, after you account for interest payments on the national debt, debt never stopped growing!! That is shown in the above graphic.


Cloud 5: Long Term Weakened Economy

Job Losses in the last 12 Recessions (Source: Calculated Risk)

Calculated Risk published this telling chart comparing job loss recovery in the 12 recessions the U.S. has endured since the end of WWII.

The current recession is, by far, the widest and deepest dip in job losses of all 12 recessions.

Most disturbing of all is that it has a flat job recovery curve totally unlike any of the previous 11 recessions.

For the others, the deeper the dip, the steeper and faster was job recovery.

This time it isn’t happening. In fact, it is quite the opposite. Job recovery is painfully slow and will take many years just to get back to where we once were.

Cloud 6: Crushing Growth of Health Care Costs

Health care costs soon to overwhelm federal budget (Source: Bipartisan Policy Center)

The 2011 CBO long-term budget forecast, released last June, is chucked full of bad economic news.

The most dire prediction of all is the rapid rise in health care costs.

It will eat up the lion’s share of federal budget growth in the next 10 years and beyond. By 2021 it will grow from 5% of the total GDP to 7%; and thereafter continue rising linearly.

The graph of it from the CBO report was redone for readability by the Bipartisan Policy Center and used in the Wyden-Ryan White Paper on Medicare reform options released just 3 days ago on 12/15/2011. That graphic is reproduced here.

Obamacare was supposed to reduce health care costs. Obviously, it won’t. At present, no plan before Congress considers serious solutions to rising health care costs.

The bipartisan options to reform Medicare, put together by Senator Ron Wyden (D-OR) and Senator Paul Ryan(R-WI), has got nothing but criticism leveled at it.


Hurricane warning flags are flapping strong against clear fiscal skies.

The conditions are perfect for an economic calamity like the Great Depression.

The reason we bask unconcerned on our collective front porch admiring the gathering clouds is that interest rates on national borrowing and inflation are at historic lows.

We are complacent. We are blind. We can’t see the storm coming.

But all the ingredients have come together:

  • High public debt rising at unprecedented speed
  • A weakened economy under the slowest job growth recovery in modern history
  • Extraordinarily fast rising health care costs
  • Inaction

The final piece of the puzzle strengthening the storm to hurricane force is this nation’s collective desire to do nothing at all.

The longer we kick the can down the road, the bigger the coming storm becomes.


About azleader

Learning to see life more clearly... one image at a time!

Posted on Dec 18, 2011, in Debt, Debt crisis, economics, Economy, GDP, Gross Domestic Product, National Debt, news, Obamacare, Politics. Bookmark the permalink. Leave a comment.

Comments and questions are welcomed!

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: