Tuesday, September 21, 2010

Note to Karl Denninger: Government Debt Does Not Necessarily Equal Deficit Spending

Karl has been using this chart for awhile now:

Attribution: http://market-ticker.org/akcs-www?get_gallerynr=13

In this case, Karl uses the chart to rebut the assertion by Dean Baker that the current national debt levels are not worrisome.  Dean Baker is a pretty smart guy, but he tends to lean farther left than Karl does right, so I felt compelled to dig into who is correct.

While I still don't know the answer to that question, I do know that Karl is wrong at least for the reasons he assets to support his position.  Why?  Because the chart above appears to divide national debt by GDP.  That is, Karl is assuming that government borrowing equals government spending.  That assumption is incorrect at the moment because over a trillion dollars that the Treasury borrowed (by selling treasury bonds)was dumped on the balance sheets of banks as reserves and have not been spent:

As you can see, the ramp in bank reserves corresponds to the ramp in "deficit spending" in Karl's graph.  In order to make Karl's graph correct, he needs to back out these unspent reserves from the Treasury debt to derive the actual deficit spending number, which I suspect will be closer to 6-8% instead of his asserted 12%.  Indeed, if you use the Federal government spending numbers in the BEA's GDP data instead of the Treasury "to the penny" data, it shows only 8.1% of GDP for 2009 was government spending (not necessarily deficit spending), instead of Karl's 12%.