The Wilder View

Who has the most debt in the US?

This was the question posed to a group of my colleagues as regards the merits of US fiscal and monetary policy: guess who has the most debt in the US economy? Everyone at the table said ‘the government’. When most pundits talk of ‘government debt’ they are inherently referring to federal government, who is not the highest explicit debtor in the non-financial US economy (total nominal debt outstanding excluding financial and foreign financial domestic debt outstanding).

Coming to the answer of this question can be rather complicated.

According to the Federal Reserve’s latest flow of funds accounts (see Table D.3 in the following .pdf link), federal debt outstanding was $11.11 trillion. US household debt and US non-financial business debt outstanding were each greater: $12.95 and $12.01 trillion, respectively. Here, the US federal government does not have the largest stock of debt outstanding.

Well, you may then say the following: look at the general government, or the public sector which includes the US federal government plus state and local governments. The public sector (general government) does have the largest stock of debt outstanding, $ 14.11 trillion. But for a comparable analysis, then one needs to consider the ‘private sector’, which includes household plus non-financial business debt outstanding. Private debt outstanding dwarfs that of the public sector debt outstanding: $24.95 trillion vs. $14.11 trillion, respectively.

While the US federal government is popularized as being the largest debtor in the US economy, it’s not. Look at the time series in natural logs – by taking the natural logarithm of the public and private debt outstanding series, the slope of the line is a growth rate. I’ve put the two on different axis, so this chart is not precisely correct; but the trajectory of government debt took another leg upward on Q1 2008 at the outset of private sector deleveraging. Better put: the government is ‘financing’ the private sector’s desire to save.

So outside of default or inflation, the government does bear the ultimate burden of private sector debt.

Clearly there are legacy issues with the federal government debt overhang – wars, wealth taxing policies, etc. But the entire story of debt burden includes a large share felt by the private sector; this often goes unnoticed when bringing up ‘debt’.

Another part of the story for the US federal government that is bound to come up in a discussion of public debt is the GSEs and contingent mortgage liabilities for the government. The government’s responsible, either explicitly or implicitly, for about $5 trillion of mortgages outstanding – this is not included under the ‘federal government’ debt outstanding above. To that I would reference the $16.1 trillion in financial debt outstanding (domestic financial plus foreign debt outstanding in Table D.3), of which GSE-backed mortgage pools are a function. There’s still quite a bit of financial leverage in the private sector. In the 1980s, the stock of financial debt outstanding was 22.1% of the total non-financial debt outstanding. Today, financial debt is 41.3% of total non-financial debt, and that’s down from a peak of 56.7% in Q2 2008.

Debt is a complicated story. What’s less complicated is that there’s too much of it.

Rebecca Wilder

26 Responses to “Who has the most debt in the US?”

rjsigmundOctober 2nd, 2012 at 9:37 pm

i understand what you're pointing out here, rebecca, but i have a problem with seeing private debt compared to federal government debt, which isnt as much an obligation as it is the grease that lubricates the financial system…

ie, what would happen to global finance if the US government would suddenly retire the debt and took all the treasuries out of circulation?

i'd rather we speak of a million dollar Treasury bill as money and a medium of exchange in much the same sense that we speak of a ten dollar bill as money…

WidgetmakerOctober 3rd, 2012 at 5:00 pm

Yes, indeed, rjsigmund. I'm beginning to see federal debt as just another component of the money supply. It is a very hard thing to articulate succinctly, but it is very, very different than private debt. The US Govt cannot default – it issues money out of thin to cover its obligations – servicers of private sector debt do not have that ability. Govt bonds are like a sponge to sop up all the excess liquidity in the system to keep the economy from overheating and inflation in check. And all that US government debt serves a useful function as there seem to be a shortage of safe assets for savers to store their wealth. Interest rates are so low because of the high demand for these assets.

I think this country has been overrun by debt hysteria. It is an easy point for the politicians to harp on to stir up voter sentiment. Everyone relates to private debt, but this is an entirely different animal. I remember Alexander Hamilton's words, which would get him strung up for heresy today – "Public debt is a blessing".

WidgetmakerOctober 3rd, 2012 at 6:08 pm

Good point. I've read a lot about MMT, and that is a major emphasis (although I think the MMT'ers can get a bit rabid). This is also the major problem with the EU – the member states are constrained as they cannot issue currency.

It's a bizarre thing, and few people seem to grasp it (i.e. Paul Ryan and others comparing the USA to Greece). Private sector debt has been shrinking these past few years. This means that consumers are not spending – they are paying down debt. One person's spending equals another's income, hence the economy is depressed (I think you already know that). So the Federal Govt steps in as the spender of last resort – these large federal deficits have saved our collective asses. Unfortunately, state and local govts have been cutting back, which negates a lot of what is being done at the national level.

WidgetmakerOctober 3rd, 2012 at 6:09 pm

Now, if we had the political will, we could embark on huge infrastructure spending. Put all those unemployed people to work. Though the debt would expand, we would have an improved infrastructure, and even better, the stock of human capital in this country would be so much stronger. The long term unemployment situation is creating a permanent underclass.

Remember, public dept to GDP was 120% after WWII. We paid it down to 35% by 1980. It currently stands at just over 70%. Economic growth was greater in the 50's and 60's then what it has been over the last 30 years. And think about this – it costs about 1% of GDP to service all of our Federal debt (and half of that goes back into the domestic economy).

As I've said, it's mind boggling. And it's also a political hot potato that is being misused to scare the public into making bad decisions in order to advance someone's agenda.

JohnOctober 10th, 2012 at 8:17 am

Your living in a dream world Widget. After WWII we didn't have the entitlement programs that so many have become dependant on. Social Security was running a surplus and the Great Society Plan was over a decade away. All infrastructure projects do is temporarily employ people. You keynesian folks think we can inflate our way out of this but the reality is we will default on our debt. It will be a t least a 50% haircut on US debt and it will happen in the next 5 years, It will take down the stock market and bond markets and put us in a long lasting depression with peoples 401K's being decimated along with pension funds. Then grandma won't be able to afford dog food or anything else because of the austerity that follows. Oh yeah it doesn't cost 1% of GDP to finance our debt(it's more than twice that amount) and that shows you need to dosome due dilligence.

JohnOctober 10th, 2012 at 8:17 am

nd how about this nonsense of Operation Twist which is supposed to be selling long bonds and buying short bonds (Less than 3 years). All that is really happening is the Fed is buying short bonds and making the long bonds disappear. That's why they don't want the Fed to be audited because it's all a scam. If they were really selling Treasury bonds of longer duration the interest rates on thos longer bonds would rise because of the sudden oversupply. This is electronic money printing and it will end very badly.

Patrick_VBOctober 3rd, 2012 at 9:19 am

Hi Rebecca, thanks for the discussion of the data. However, I second the opinion of rjsigmund, public sector debt has its uses, if only in compensating for market failures, overcoming coordination problems and dealing with macroeconomic stabilisation. Furthermore, public debt, inasmuch as it is domestically-held and in domestic currency, is as much an asset as it is a liability: US citizens borrow from and pay to US citizens. Of course, there are generational and distributive issues here, but that is another matter, one of politics and social choice. Finally, regarding your "there's too much of it", nil or negative real long-term interest rates on US government debt would lead me to have the opposite view. Now, I'm definitely not stating that there is never enough public debt! Clearly, when nominal interest rates on sovereign debt rise above nominal GDP growth rates, one should begin to worry about long-term debt sustainability. This is currently the case in Greece, Spain, Italy… Not (yet) the US.

Rebecca WilderOctober 3rd, 2012 at 10:02 am

Patrick_VB and RJ,

Your points are well taken! I agree, government debt is a completely different animal than private sector set. First off, private sector debt is binding, whereas the government issues debt more as an asset for the private sector to hold rather than to truly finance itself in any way. The government runs a deficit (or surplus) but does not 'borrow' in the usual sense, since the debt is denominated in dollars.

I could have gone down that route with this article but I wanted to illustrate that government debt is roughly the accumulation of the price sector's net desire to save, and that there's still an arguably large financial burden out there, although that analysis would require more normalization if the data (yes, even in the corporate sector, especially if you make a cross-country comparison).

People in my business have tunnel vision that is keenly focused on the public balance sheet as if it's evil in some way. That is a mistake.


WidgetmakerOctober 3rd, 2012 at 6:17 pm

Yes, I agree. And I also want to make the comment that I appreciate you pointing out the level of private sector debt in the economy. I'm an avid reader of economic blogs and I was not aware of this – it is an interesting point and adds perspective to the discussion.

Debt does not equal evil.

Rebecca WilderOctober 3rd, 2012 at 10:05 am

Also, when I say there's too much of it – I was referring to total economic debt, which includes all sectors private plus public. The housing boom should never have happened with proper regulation.

MichaelOctober 3rd, 2012 at 10:18 am

if there is too much debt, then there is too much wealth, because there is no debt which is not owned by someone. But rising government debt can be a cure, because the government can in principle get rid of it easier than private debtors. e.g high inflation, but low interest rates (but it takes a long time). Alternatively with higher taxes or default, both contractionary but faster.

WidgetmakerOctober 3rd, 2012 at 6:24 pm

That seems to be a vague and nebulous concept – it would be a very subjective number based upon different projections that can change within a few years. I know people like to throw that $50 trillion net present value of the unfunded Soc Sec & Medicare liability number around to impress and scare voters.

What about the other side of that coin? What is the net present value of all the goods and services this country is projected to produce over the same amount of time. Let's be truthful – shouldn't that number be included in an honest discussion? I would bet that $50 trillion dollar figure would be eclipsed by that figure.

Edward StevensOctober 3rd, 2012 at 1:31 pm

Public debt can only be serviced from the future output of the US economy!!!!!
To the dgree that the NPV of that future economic output has declined the debt capaicty of the sovereign is reduced!!!!!
The greater claim that the public sector has on that NPV of economic output, the less the non-public sector has to spend and invest.
You can forget the fact that the US has had limited if nay domestic savings over the last three and that the imbalance between consumption and savings is at its greatest in the last 100 years — please feel free to do that
BUT, governments almost never pay back debt (see how long the Clinton surplus lasted and how may time in modern history, that government has run a surplus) — they either grow into it in real terms, inflate the debt away, or abrogate their obligation to pay it back ( default).

Skeptonomist HabilisOctober 3rd, 2012 at 3:02 pm

It would be interesting to trace these measures back from the start of the 20th century (on the same scale – why use slightly different scales?) How did they change through the Depression and WW II?

EugenROctober 3rd, 2012 at 4:56 pm

The public debt is partly the monetary base (2 trillion), partly liability to long term funds (6 trillion) partly foreign holdings (5 trillion), that leaves 1-2 trillion in the public hands. Where am i mistaken?
If the foreign holders will want to get rid of their holdings, the US dollars exchange rate will be depreciated. Whose problem exactly is it?
I would say United State checked the world economy. We are waiting for the next move. It will come probably from the Chinese.

Edward StevensOctober 3rd, 2012 at 6:47 pm

The US government doesn't have $ 117 trillion in assets — its people do. Unless you want to extort it all from the people. Sounds like some here would very well like to do that
The US government is technically insolvent– assets it owns are worth less than the debt it has; The current negative net worth of the US government id approximately 3x its GDP or $45 trillion. All the Federal government really has is (a) the abilty to take future productivity of its citizens and (b) a large land holding west of the Mississippi (imagine what would happen to the price of land west of the Miss. if the fderal government styarted to sell it.

It is that collective wealth and future income that governement can take. If you wnat to se the numbers go to the Fed's Flow of Funds stats as a starter

EugenROctober 3rd, 2012 at 8:39 pm

Dear Stevens, i am the last to suggest, that US should use its extra equity it has to wast it on overconsumption. Yet the 117 trillion stand against the 49 trillion. I don't get from where you get your 45 trillion. As to the government debt repayments, i have to disagree with you even more. If the US government would like to reduce its deficit, all it had to do is to impose consumption tax on the fuel and VAT, as it exists in Europe, and without calculating it i can assure you, there will be no need to sell part of US, as Napoleon did it just 200 years ago.

benleetOctober 4th, 2012 at 5:08 am

I wonder why the author did not include financial corporate debt in her findings. Table D.3 shows total financial corporate debt at $13,856 trillion in 2012, Q2. That is larger than the other 3 sectors she first mentions at the top of her article. Financial sector debt in 1980 was $584 billion. Adjusting for inflation, finance increased its debt by 8.5 times. As a portion of GDP it grew from around 20% to 120% between 1979 and 2007 when it suffered a partial meltdown. I think financial sector debt build-up and crash caused the recession. The Statistical Abstract shows (Table 722) that financial assets collapsed by $9.3 trillion between 2007-2008, triple the collapse in household residential assets.
Here's some data from my blog,
Between 1980 and 2008, 28 years, the economy's output per human, GDP per capita, grew by 67%.
The inflation adjusted GDP had increased by 2.26 times, from $5.8 trillion to $13.2 trillion.
Total domestic debt increased by 4.34 times, from $11.8 trillion to $51.6 trillion.
So debt increased at double the rate of economic growth.
Financial Corporate debt grew from 20.7% to 120.0% of GDP
Household debt grew from 50.2% to 96.6% of GDP
Non-financial business debt grew from 52.9% to 80.0% of GDP
Government (federal and state) debt grew from 38.7% to 64.7% of GDP
(I chose to use 2008 as the end year because financial corporate debt peaked in that year.)
I used BEA figures for GDP and Flow of Funds figures for debt components.

Denver BillOctober 9th, 2012 at 3:24 pm

Proactively increasing U.S. debt at this juncture to ameliorate deflation may, in the short-term, be better than the alternatives. But those writers herein who suggest this is not likely to produce significant long-term negative consequences have not learned the lessons of history – you are looking at the trees, not the forest. In March 2006 I wrote a piece titled: Over-leveraged and Underfunded: What's the Future of America ? I concluded that the 'standard of living of the average American would decline for a generation or more'. Subsequent events make me more confident in the prediction.

John WilkinsOctober 19th, 2012 at 1:51 pm

The Federal debt is the non-government sector assets. When I die my children and grandchildren will inherit my Treasury-bonds. Do you think they will find that a good thing or a burden?

manfrummarzOctober 24th, 2012 at 12:13 am

Why is it that debt has become such an easy coat to wear? When I look at the $XXX that I owe in my small business, I see my personal lifestyle, future economic security, and transferable wealth taking second seat to re-payment to the powers to be. And yet, with the past bubble making it so easy to get in this position, here I am. Stuck in a type of economic slavery. All I can hope for is for- a fat sow to land in my lap, so I can bring it to the altar of money for sacrifical slaughter. Just need one more hard charging, kick ass, cash cow of a bubble to get me there. Funny, I sound like I need to be in rehab………

SchofieldNovember 8th, 2012 at 4:23 am

How come the Chinese government can create money with zero or near zero interest so there is little hidden tax? How come the Chinese government can roll over this debt or even cancel it? Could it be that only stupid white people blindly accept the need to have hidden taxes applied to their money creation systems to support a parasitic rentier class in the style they've been accustomed for a very long time?

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