Sidebar: Debt or Poker Chips?

Winter 2010 -- Is U.S. government debt really hitting 100% of GDP soon? Or is the debt level actually closer to 65% of GDP at the end of 2010, as the Commission on Fiscal Responsibility and Reform reports?

The answer is: yes.

The total public debt outstanding is the gross total of sovereign bonds issued by the U.S. government. That’s around 95% of GDP at the close of 2010. But of that debt, an amount equal to around 31% of GDP is held by other U.S. government agencies, such as the Federal Reserve and the Social Security Fund. So a debt of around 65% of GDP is what remains as debt held by the public.

The debt held by the public is a crisis measure: it represents contractual obligations that must be paid unless the U.S. government declares bankruptcy. It’s the debt that has to be continually serviced on the open market as Treasury bills come due and must be rolled over into fresh debt issues that people either will or will not buy.

The remainder represents promissory notes or poker chips the government has given to itself. These promissory notes let the government pretend that Social Security has more funds that it really does, for example. But the day of reckoning is still distant, and the whole debt could be wiped out just by re-jiggering the benefit rules of Social Security. This would break promises made to workers and retirees, and it would probably be political suicide, but it would not require outright bankruptcy.

The total public debt outstanding is a clear measure of the scale of indebtedness and profligacy in the Federal system . Even so, it leaves out certain off-balance-sheet obligations, such as the funding of Fannie Mae and Freddie Mac, the government-backed mortgage clearing houses. It’s the total public debt outstanding that will cross the 100% of GDP threshold soon

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