Considerations
Debt and Debt Service Considerations
1. Given the present rate environment, move the maturity of the debt out as far as possible including consideration of 50 year bonds.
2. Use debt judiciously. In good times, pay off the debt. In times of national emergencies such as major wars (WW II not Korea or Iraq) or economic calamities (the Depression or the Great Second Contraction we are suffering thru presently), use debt as one of the means to solve the crises. As Robert J. Samuelson noted in a recent article, since the 60’s we have forgotten this wisdom and have abused debt and by so doing have limited our flexibility when we face a real crisis. In other times, do not run a deficit. Either increase taxes or decrease expenditures.
3. Set a target of debt as a percentage of GDP. The Simpson Bowles Plan suggests a 30% target. United We Stand suggests 10% or less in normal times. It is a matter of risk and flexibility. According to the economists Reinhart and Rogoff in their book This Time Is Different, a ratio of Debt to GDP of 90% or more puts the country at risk in terms of a weak slow growing or no growth economy. This finding is still true despite the spreadsheet errors recently discovered. The latest run up in debt has been from the low 30’s to the mid 80’s in terms of GDP to Debt ratio. Many economists would suggest we need further stimulation via further debt spending by the Federal Government. If we do that, it puts us in the range where we damage our economy. If we had started out at a 10% ratio of Debt to GDP, we would still have considerable flexibility.
4. Robert J. Samuelson, in his editorial of February 25, 2013, had a constructive discussion of the US Debt and the complexity in counting it. He notes that there are 5 different figures that a reasonable person could use in establishing the level of US debt depending on what was included. The five are as follows:
| Category | FY2012* | GDP% |
| Treasury Debt Held by the Public | $11.3 | 73% |
| Gross Treasury Debt | 16.0 | 103% |
| Category 2 plus Federal Guarantees or Loans | 18.9 | 122% |
| Category 3 plus Housing Debt | 24.0 | 155% |
| Category 4 plus FDIC | 31.3 | 202% |
| * in Trillions | ||
Not counted are the Medicare, Social Security, Medicaid, and other liabilities which are not debts but future liabilities that are subject to change by the acts of Congress. In an accounting sense, the management of the Federal Government (the President and his Chief Financial Officer) may choose to book these on their financial statements or only in the footnotes to those financial statements. The audit opinion on the US Federal Government given by their outside auditors will depend on their choice in this matter.
Remember Reinhart and Rogoff and their economic analysis above. When debt exceeds 90% of GDP, growth is slowed. Clearly on 4 of the 5 measures of debt in FY2012, we exceed this slow growth cutoff. Perhaps this, in part, explains our slow expansion since our major recession in 2008. It also makes it imperative we take action swiftly.