FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
August 25, 2020

IN THIS ISSUE

1. The Media’s Argument Over the Size of the National Debt

2. Is Our National Debt Really $26+ Trillion or Only $20 Trillion?

3. Why Do Media & Liberals Mischaracterize Our National Debt?

4. Maybe There’s No Limit to How Much Debt We Have – NO!

Overview – The Argument Over the Size of the National Debt 

Since we got the horrible news at the end of July that US Gross Domestic Product plunged by almost one-third in the second quarter (-32.9%), more and more economists and financial writers have been warning that our debt-to-GDP ratio has exploded to levels many have long believed would lead to a collapse of the economy and soaring inflation.

I think we can all agree that the 35+% plunge in GDP in the first half of the year certainly qualifies as an economic collapse, but inflation continues to be tame, and most forecasters continue to expect at least a fairly strong economic rebound in the remainder of 2020 and next year.

As a result, more and more forecasters are coming to the conclusion that their long-held worries about the debt-to-GDP ratio sinking the country – if debt rose above 100% of GDP – were probably unfounded. And increasingly they are now saying we can take on even more debt if we want.

We can debate that conclusion, of course, but today I want to point out (as I have for decades) that the national debt level cited by most economists and financial writers is grossly UNDERSTATED, thus making the debt-to-GDP ratio also understated.

The issue is whether our total national debt of $26.7 trillion currently is the correct metric we should use for such calculations, or whether we should only consider the “debt-held by the public,” which was considerably lower at only about $20.6 trillion at the end of June, or about 106% of GDP. While many forecasters and the media prefer to cite only the debt held by the public, every few years I feel compelled to remind my clients and readers that such thinking is just plain WRONG.

That’s what we will talk about today.

Is Our National Debt Really $26.7 Trillion Or Only $20 trillion?

Our total national debt today is now $26.7 trillion, the largest ever, as reported by the Treasury Department and tracked by the US Debt Clock. There is no argument over that figure. However, our total national debt is broken down into two components: “Debt Held by the Public” and “Intra-Governmental Debt.”

Debt Held by the Public includes all US government debt held by individuals (like you and me), foreign investors, US and foreign corporations, non-profits, foreign governments, etc., etc. Currently, the debt held by the public is just over $20 trillion.

US Intra-Governmental Debt represents the other roughly $6+ trillion (or about 25% of the total outstanding), which is owned by various US government agencies. And herein lies the longstanding argument.

While there is no argument over the total outstanding debt amount of $26.7 trillion, most mainstream economists and the media argue that the $6+trillion in Intra-Governmental Debt should NOT count against our total national debt.

They like to argue that this is “debt we owe to ourselves” since it is rarely ever repaid, so it should not count toward the national debt – and should not be included in calculations such as the debt-to-GDP ratio. To that, I say HOGWASH!

It’s ALL US debt backed by the full faith and credit of the government!! It ALL matures every so often and must be rolled over in the form of newly created Treasury securities (Treasury bills, notes & bonds). It ALL earns interest which is always paid in full.

So, no matter who owns it – whether it’s you or me, or some foreign government, or the US Defense Department (for example), every penny of outstanding Treasury debt is an obligation of the federal government.

To me this is a NO-BRAINER!

Why Do The Media & Liberals Mischaracterize Our National Debt?

As noted above, most in the mainstream media and many economists and financial writers refer only to the Debt Held by the Public when talking about our national debt. Quite simply, I believe it’s because they don’t want us to know the true size of the national debt, and they purposely understate figures like the debt-to-GDP ratio.

I find it interesting that they continue to promote such misinformation at a time when the public has become oblivious to the size of our national debt. Sadly, few Americans care about the size of government debt. Clearly, almost no one in Congress cares anymore, including most Republicans and our President, I’m sad to say.

I bring all this up once again because many economists and financial writers have been posting articles showing that our debt-to-GDP ratio only recently topped 100%. They mischaracterize it by using only the Debt Held by the Public of just over $20 trillion as our total national debt.

At $20.63 trillion in government publicly held debt at the end of June, with GDP running roughly $20 trillion, our national debt-to-GDP ratio stood at about 106% for the first time using that metric. Again, very misleading!

Yet if we use the total national debt of $26.7 trillion – which in fact it is – then our debt is over 130% of GDP – and still no one seems to care.

Maybe There’s No Limit to How Much Debt We Have – NO!

Wait it gets worse. Some of the same economists and financial writers who have warned for years that debt of more than 100% of GDP would sink the economy and send inflation soaring are now saying: Oops, I guess we were wrong and maybe there is now virtually NO LIMIT on how much debt the US can take on. Incredible!

They generally explain this change of heart because, they say, the coronavirus pandemic, and the economic collapse that followed, necessitated a historic run of government borrowing and spending. Trillions of dollars for stimulus payments, unemployment insurance expansions and loans to prop up small businesses in an effort to keep the economy afloat.

Given the uniqueness of the current crisis, they argue such massive borrowing won’t sink the economy or cause runaway inflation. Several well-known economists and financial writers I’ve read in the last several weeks even went so far as to suggest the country could take on considerably more debt without any serious consequences. Say what?

Of course, Congress is more than happy to accommodate them. The House recently passed another massive $3+ trillion stimulus package by a comfortable margin. President Trump and Republicans have countered with a $1 trillion stimulus package. Both sides are at a loggerhead as this is written and negotiations have stalled.

With Congress away on summer recess, negotiations are not expected to resume until September when lawmakers return to Washington. While both sides are holding firm, I trust there will be a compromise, probably something in the neighborhood of $2 trillion.

The Democrats are calling for the resumption of the $600 payments per week ($2,400 a month) through at least the end of January for families which qualify. Republicans, on the other hand, generally favor monthly government payments of $300 a week ($1,200 a month) for a family of four, if qualified.

The Congressional Budget Office estimates the federal budget deficit for fiscal year 2020, which ends on September 30, will approach $3 trillion – over three times our previous highest. And that estimate does not include the additional trillions expected to be approved when Congress gets back next month.

Our budget deficit could approach $6 trillion this year! And again, no one seems to care. The economy, they say, is going to come roaring back between now and the end of the year and have a strong 2021. I’m still NOT convinced of that. I still see a massive wave of business bankruptcies in the months just ahead.

Despite this threat, the stock markets hit new all-time highs over the last two weeks. Equity investors don’t seem to be the least bit fazed by the prospects of a wave of bankruptcies.

The looming wave of bankruptcies just ahead doesn’t seem to be a major concern on the part of most investors or the talking heads on cable TV, but I predict that could change very soon.

While I don’t pretend to have all the answers, I just don’t see this ending well. I hope I’m wrong!

EDITOR’S NOTE: I have received some negative feedback from a few readers regarding my August 11 discussion about the potential problems which could result if we do nationwide “mail-in” voting. What I failed to mention is that some states already conduct mail-in voting and are apparently doing so successfully – New York and New Jersey not-withstanding.

My main argument was against doing mail-in on a nationwide basis with only70 days until the election. My other concern was/is the Postal Service’s ability to handle an extra 300 million pieces of mail (over 150 million ballots mailed out and 150 million or so mailed back in) in such a short time.

To those states already doing mail-in voting successfully, by all means continue it, if that’s what your voters prefer. But heaping all mail-in voting on the entire country in such a short time is a recipe for serious problems in my opinion.

All the best,

Gary D. Halbert

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