It’s All Connected, Man

October 23rd, 2011 at 10:15 am

Bill Marsh presents an interesting picture of interconnectedness in this AM’s NYT.  It’s a great visual of the myriad connections through borrowing and lending across borders, but a few nuances to consider:

–some folks who follow these numbers will be surprised to see US debt to GDP listed as 100%.  This is gross debt, including about 30% of GDP that the gov’t owes to itself (more on that below).

The relevant metric for this picture should not be gross debt.  It should be debt held by the public—that’s the number that markets care most about because that is a measure of our government’s debt obligations to external creditors.  According to CBO, debt held by the public as a share of GDP is expected to be 71% in 2012.

If you want to learn more about this important distinction, see this from the CBPP.  As that analysis points out:

“Such a focus on gross debt is seriously misguided and could inhibit the effort to address the nation’s long-term fiscal challenges.

Debt held by the public consists of promises to repay individuals and institutions — in the United States and abroad — who have loaned the federal government money to finance deficits. Gross debt includes, in addition to the debt held by the public, so-called intragovernmental debt —money that one part of the federal government owes another part. More precisely, intragovernmental debt consists of promises to repay certain federal government accounts, such as the Social Security Trust Funds, for amounts they lent to the Treasury in years when their earmarked revenues exceeded their outgo for benefits and other costs.”

Here’s how CBO sees it:

“Long-term projections of federal debt held by the public, measured relative to the size of the economy, provide useful yardsticks for assessing the sustainability of fiscal policies.” In contrast, “gross debt . . . is not useful for assessing how the Treasury’s operations affect the economy.”

–the article states that American banks are heavily exposed to some of the countries with serious sovereign debt problems, including Spain, Ireland, and Italy.  Not according to the figure below from Moody’s.  Which doesn’t mean we’re out of the European debt woods at all, however.  Many US investors and funds are exposed, and we export a lot to the Eurozone.  So contagion is a real worry, no question.  But I don’t think it comes mostly through our banks’ exposure to the shaky debt.

–the most important question about all this in the near term is what happens next.  From where I sit, European negotiators are slowly and haltingly moving the in right direction, but the process is really quite disconcerting.  You hear about progress toward the only solution that I think will work—rip the band-aid off Greece, creditors take big haircuts, a robust fund to backstop exposed institutions—only to read the next day that it’s hit a wall.

–the second more important question is a medium-term one: what measures must be taken to avoid being back here again soon.  From where I’m still sitting, that’s a question about debt, and I mean at every level: households, corps, banks, governments.  I’m convinced there’s a global misunderstanding of the concept—as Minsky discovered decades ago: “stability is unstable.”  With booms, come destabilizing debt bubbles that have us stuck in the economic equivalent of the shampoo cycle: bubble, bust, repeat.

More on this in a forthcoming piece I wrote for the journal Democracy.


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6 comments in reply to "It’s All Connected, Man"

  1. Michael says:

    This continues until banksters go to jail, so until at least 2017.

  2. Beez says:

    Why is it ok to default on our Treasuries owned by the Social Security system? If we ever do default, you can be sure that those Treasuries are the only ones that it will be politically impossible to default on. More than just the political realities, those are real obligations if we want to have a healthy Social Security system.

  3. Altoid says:

    Yeah, the social security assets are my question too. Unless I’m missing something, they have to be cashed in by either retiring them with current tax revenue or turning them over for new public debt. They don’t have any other funding source, do they? So for all practical purposes that’s public debt.

    But I don’t think they’re politically impossible to dodge; in fact I think they’d be about the easiest federal debt to default on. Indeed, imho setting up a default on them has been one of the big underlying goals of all the scare talk about SS over the past couple of years. If I’m remembering correctly, the total amounts to something well over a trillion. Even if it’s redeemed over a long period, doing so would still take really substantial annual tax revenue.

    • Jared Bernstein says:

      Nope–they’re not public debt…read the link to the CBPP piece and see if that helps…eg, if we got rid of the trust fund debt tomorrow, the public debt would be unaffected…it would be the same amount it is today.

      When the trust fund needs the money, it redeems the bond and the Treasury has to pay it…there’s no default risk of any magnitude that I can imagine.

      It is true, as you suggest, that the bonds will be redeemed out of general revenues…but again, the only question is will the US gov’t default by not paying the debt it owes to itself (ie, to the trust fund)? If folks want to make that argument, I can’t stop them. But I don’t get it.

      • Altoid says:

        Thanks for replying, Jared. I think I see what you mean in the context of federal debt and its effects on the overall economy. I was looking at it from a different angle, primarily the SS trust fund and its budgetary effects.

        I took that view because I don’t think anyone really deals directly with the need to fund redemptions out of general revenue or else roll the bonds over into new debt issues. It’s going to be a growing, and eventually pretty big, chunk of annual budgets or annual public borrowing, and from that standpoint needs to be planned for and its presence makes SS politically vulnerable.

        Of course, that’s as things are currently structured. Lifting the income cap, changing benefit schedules, etc, would clearly affect the rate and/or need for redemption and the degree to which the trust fund would actually become either public debt or general fund liability.

        My big concern is that the Ryans of this world would, best case, use the trust fund to in effect close out SS as currently known. But I really think what they wanted was to just say “we can’t afford any of it,” switch over to private accounts, and never redeem any of the surplus that’s been building up for nearly 30 years now. Just leave it to languish in the drawer.

        They’d do that for ideological reasons and because it would eventually free up a hundred or so billion on the annual budgets. That’s a big part of what I think they were really playing for.