Is the U.S. growing, or just issuing debt?

October 27, 2012

The collective output of the U.S. has increased modestly in the most recent quarter, as Reuters reports:

Gross domestic product expanded at a 2 percent annual rate, the Commerce Department said on Friday in its first estimate of the third quarter, a pick up from the second quarter’s 1.3 percent pace.

This is positive news, but did the economy really expand? Or is it possible that the government just issued more debt that flowed into the economy and was picked up as “growth”? More reporting from Reuters:

The report was a bit better than economists had expected, in part because of a surge in government defense spending that was not expected to last. Defense spending rose at its fastest pace in three years, combining with the rise in household consumption and a jump in home building to strengthen domestic demand.

You can see in the chart above that the amount of U.S. debt issuance far exceeds the dollar amount of growth for the national economy. Part of the debt issuance is used to repay old bonds that reach maturity and must be repaid. According to the Treasury Borrowing Advisory Committee, which is chaired by Matthew Zames of JPMorgan, $276 billion of third quarter 2012 debt issuance was “new money,” beyond what was needed to pay off old bonds. The real dollar growth in the GDP was $190 billion, much less than the amount of “new money” debt issuance. Treasury bond issuance seems to have financed all the growth in GDP.

Is deficit borrowing at this level sustainable? Becky Quick, of CNBC’s “Squawkbox” wrote on

America took in $2.45 trillion last year and spent $3.54 trillion, leaving us with a deficit of about $1.1 trillion. A nation with as much goodwill as ours can do that from time to time, but this marks the fourth year in a row we’ve spent over $1 trillion more than we took in. Just in that time, we’ve borrowed more than $17,000 for each man, woman, and child in the country.

So we have been adding debt to the national credit card for four years to get through rough times. But bond investors analyze this differently. They want to know if the government’s cash flow dedicated to servicing the debt is adequate. Becky Quick writes:

The interest payments on all that debt are a potential tsunami of their own. We’re spending $258 billion a year on interest payments for our massive debt. That’s more than we spend on the departments of Commerce, Education, Interior, Energy, State, Homeland Security, and Justice combined. And the Congressional Budget Office projects that if we don’t tackle some of this debt, our interest payments will soar to $1 trillion a year just over a decade from now.

The U.S. issuing debt to juice economic performance works in the short term, but it has substantial costs in the long term. Pimco’s founder Bill Gross calls this addiction to debt “budgetary crystal meth”. Maybe it’s time for the nation to face its addiction to debt before bond investors start charging us more interest to borrow. Or maybe we need to really hit our true bottom first.

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