The public debt scene | Looking for Alpha


With respect to public debt, the US economy has gone through a significant transition over the past fifteen years.

Let’s look first at the growth of public debt since the 1960s. The trend was upward in the early years, but the public debt growth really took off at the end of 2007.

Then there is another jump and a new push from the spread of the Covid-19 pandemic in 2020.

Growth of the federal debt since the 1960s

Growth of Federal Debt from the 1960s (Federal Reserve)

We can move from a longer term view of this growing debt burden to one that focuses only on the period since the start of the Great Recession in December 2007. This is the period we will focus on the most in this post.

Total public debt

Federal debt: Total public debt (Federal Reserve)

The crucial thing to see in this chart is that this period should be split into two periods.

The first, one might say, is the Bernanke era, after the Fed Chairman at that time, Ben Bernanke.

The second begins in early 2020, which is when the United States really started to be impacted by the spread of the Covid-19 pandemic.

These two changes separate the period that preceded the change from that which followed.

Fiscal and monetary policy changed during the Great Recession. Ben Bernanke became Chairman of the Board of Governors of the Federal Reserve.

Mr. Bernanke changed the way the Fed did business. First, Mr. Bernanke guided the Fed in stimulating stock prices so that the rising stock market created a wealth effect that encouraged consumers to increase their spending.

In this, Mr. Bernanke succeeded very well.

But, Mr. Bernanke followed that with two rounds of quantitative easing where the Fed regularly bought government debt to provide continued expansion of bank reserves so that the money supply could grow at a steady pace.

You can see the steady growth of government debt during this period, but this debt growth did not produce a significant rise in interest rates because the Federal Reserve was steadily increasing its holdings of government securities.

What can be seen is that total government debt as a percentage of gross domestic product increased significantly between 2008 and 2019. (We’ll look at the period from 2019 to 2022 later.)

Public Delt as a percentage of GPD

Public debt as a percentage of GDP (Federal Reserve)

One can only conclude from this graph that the public has begun to hold on to a much larger proportion of public debt than ever before.

The economy changed during the economic expansion that followed the Great Recession. Public debt was a much larger share of the financial pot, and the private sector adjusted its behavior to absorb the larger amount of outstanding debt.

And how did this debt growth coincide with the ongoing budget process within the federal government?

Federal Deficit Surplus

Federal Surplus or Deficit (Federal Reserve)

In the period from the onset of the Great Recession to the spread of the Covid-19 pandemic. The federal government has generated more deficit spending in any previous period other than the deficit spending that occurred during World War II.

Never before in peacetime has the US government generated so much debt.

What is amazing is that this deficit spending did not end up creating much monetary expansion to generate inflation.

In fact, inflation throughout the period of economic recovery from the Great Recession only reached a compound of 2.3% per year.

What happened to inflation during this period?

I have written many articles over the past fifteen years trying to describe what happened during that time.

It was a time of “credit inflation” where government stimulus money flowed into asset prices, not actual capital spending. In other words, the stimulus money went into stock prices, house prices, commodity prices, gold prices and other areas of a similar nature.

The money was not invested in actual capital expenditures as in the past. So, a lot, a lot of wealth has been created, but the creation of wealth has not happened by making the economy more productive.

In fact, labor productivity growth over this period was less than one, which contributed to very slow real GDP growth over this period.

The era was a very prosperous time, especially for the wealthy, as the income/wealth distribution in the US economy was skewed more towards the top 10% of wealth holders. But growth has been steady and sustained over a historically long period.

Then the Covid-19 pandemic hit the United States and was accompanied by the Covid-19 recession for two months.

We can see on the last graph that the public deficit has exploded and that the amount of public debt that has been created has broken records.

The percentage of GDP held by the private sector has taken a dramatic upward leap.

Again, one could say that a “new” period unfolded as investors accepted the higher debt loads and transferred the debt created into their portfolios.

The stock of public debt has increased enormously and people have absorbed it into their wallets.

The private sector has received more help in this regard than during the disruptive period following the Great Recession.

This time around, the private sector got help from the Federal Reserve. The Federal Reserve jumped straight into action, doing what it could to combat the potential disruption of the Covid-19 pandemic and economic recession.

The Federal Reserve also began buying $120.0 billion worth of US Treasury securities and mortgage-backed securities each month.

On December 25, 2019, the Federal Reserve had $3.8 trillion of U.S. Treasury securities purchased in bulk on its balance sheet.

On December 29, 2021, the Fed had $8.3 trillion of US Treasury securities purchased directly on its balance sheet.

It was a huge increase!

The fact is that the massive amount of securities that the federal government was issuing were placed.

But, you can see the amount of deficit that has been accepted over the last couple of years or so.

You can also see the incredible increase in the percentage of GDP that the private sector now owned.

So the structure of the world and the structure of investment portfolios have changed over the past 15 years.

What will happen now?

Almost all of the changes over the past fifteen years have taken place due to economic disruptions and changes in the economic programs of the Federal Government and the Federal Reserve.

Will these shifts persist, or will these shifts turn out to represent imbalanced markets that need to get out of that imbalance?

This is what the Federal Reserve and the investment community will have to work on over the next few years.

It will be a time of great uncertainty and great change.

I will be a time when a lot of money changes hands, one way or another.