William Byrnes' Tax, Wealth, and Risk Intelligence

Why is this Topic Important to Wealth Managers? Presents discussion on the national debt and national future financial outlook. A client wants to know what YOU think about Treasury Notes versus other types of government debt, even foreign government debt.  An understanding of the annual federal national deficit, and its impact on the federal national debt, will provide you a helpful starting point to educate your client, without providing investment advice.

We thought an introduction to the current economic condition would therefore be appropriate.  As of September 30, 2010, the federal debt managed by Bureau of the Public Debt totaled about $13,551 billion primarily for borrowings to fund the federal government’s operations.  A Government Accountability Office (GAO) Study recently showed the Federal Debt balances consisted of approximately (1) $9,023 billion as of September 30, 2010, of debt held by the public and (2) $4,528 billion as of September 30, 2010 of intragovernmental debt holdings. [1]

Debt held by the public primarily represents the amount the federal government has borrowed to finance cumulative cash deficits.  To finance a cash deficit, the federal government borrows from the public.  When a cash surplus occurs, the annual excess funds can then be used to reduce debt held by the public.  In other words, annual cash deficits or surpluses generally approximate the annual net change in the amount of federal government borrowing from the public.

Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds, that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.

The federal debt has been audited since fiscal year 1997. Over this period, total federal debt has increased by 151 percent.  During the last 4 fiscal years, managing the federal debt has been a challenge, as evidenced by the growth of total federal debt by $5,058 billion, or 60 percent, from $8,493 billion as of September 30, 2006, to $13,551 billion as of September 30, 2010.

The increase to the federal debt became particularly acute with the onset of the recession in December 2007. Reduced federal revenues and federal government actions in response to both the financial market crisis and the economic downturn added significantly to the federal government’s borrowing needs.  And, due to the persistent effects of the recession, experts believe federal financing needs remain high.  As a result, the increases to total federal debt over the past three fiscal years represent the largest dollar increases over a three year period in history.  The largest annual dollar increase occurred in fiscal year 2009 when total federal debt increased by $1,887 billion.

During fiscal year 2010, total federal debt increased by $1,653 billion.  Of the fiscal year 2010 increase, about $1,471 billion was from the increase in debt held by the public and about $182 billion was from the increase in intragovernmental debt holdings.

During fiscal years 2008, 2009, and 2010, legislation was enacted to raise the statutory debt limit on five different occasions.  During this period, the statutory debt limit went from $9,815 billion to its current level of $14,294 billion, an increase of about 46 percent.  Read the analysis at AdvisorFYI