Mystery solved: the difference between the deficit and the increase in national debt

For some time, bloggers have been noticing that the national debt is increasing a lot faster than the budget deficit would suggest. ZeroHedge in September:
[O]ver the past 47 months, or almost 4 full fiscal years, the US has accumulated a $3.3 trillion deficit, while over the same period, total Federal debt increased by $4.9 trillion, from $8.6 trillion to $13.4 trillion.

The ex-Wall Street types at ZeroHedge chewed on this but couldn't come up with a good explanation. Karl Denninger called it crooked accounting, but couldn't pinpoint the fraud. B-Daddy at the Liberator Today noticed the same thing and didn't have an answer. Then I threw the question over to the academics at Econbrowser:

If it's such a simple accounting identity, would you please reconcile the $1.9 trillion and $1.65 trillion debt increases in FY 09 and FY 10 with the alleged deficits of $1.4 trillion and $1.3 trillion for the same fiscal years?

And before you answer that it's the Social Security Trust Fund, intragovernmental holdings increased by just $320 billion over the two years.

So where's the other $530 billion?

None of the academics among the bloggers and commenters at Econbrowser could answer the question, until Menzie Chinn found an expert who could.

I and many others suspected the answer was in some off-budget shenanigans like Fannie/Freddie, GMAC, etc. It turns out we were right in general but missed the biggest specific off-budget item: student loans. In table S-14 of this FY2011 OMB Mid-Session Review shown to me by Menzie, you'll see that the financial asset "Direct loan acccounts" increased from $489 billion to $689 billion. And the prior Mid-Session Review (table S-15) shows that account at $196 billion at the end of FY08. So an increase in student loans accounted for $393 493 billion of the missing money over the two years.

There's also an increase of $100 billion in "Government-sponsored enterprise preferred stock" (Because Fannie and Freddie are assets to the Treasury, not liabilities, right! How are those preferred dividends working out for you, Timmy?). Together with the student loans and the change in intra-governmental holdings, that explains the vast majority of the difference between the reported two-year deficit and the actual increase in debt.

From an economic perspective, Karl Denninger is right when he argues that we should rely on the increase in debt rather than the reported deficit. The $100 billion "asset" in money-losing black holes Fannie Mae and Freddie Mac is an outright fraud. And the almost $400 500 billion in student loans is direct Keynesian stimulus: it gets spent at the colleges immediately, where it goes to pay faculty and staff salaries as well as facility construction and maintenance. Never mind that much of it will never be paid back to the Treasury due to default, forgiveness, or death.

Using the actual debt numbers rather than the massaged "deficit" numbers, it looks like we're heading into our third consecutive year of deficits well over 10% of GDP.

UPDATE: Mike Shedlock (Mish) has dug in with more commentary and analysis. Thanks, Mish!


Ironman said...

"So an increase in student loans accounted for $393 billion of the missing money over the two years."

Shouldn't that be a $503 billion increase in the amount of student loans over FY2009 and FY2010?

$689B - $186B = $503B

wcv said...


Pre-caffeine math.

But I think it's

$689B - $196B = $493B

Shane Atwell said...

Nice detecctive work. I love the internet.
Mish has carried your piece here: http://globaleconomicanalysis.blogspot.com/2011/01/budget-deficit-accounting-fraud-and-off.html
He's got some good suggestions about shutting down the student loan entitlement.

TJandTheBear said...

Yes, excellent detective work, WC!!!

Bob English said...

Nice find, and hello by the way. Came to your site from JDA.

In addition to student loans (and some other loans), "direct loans" includes GSE MBS purchases by Tsy that totaled about $240 billion (you didn't think the Fed was the only one getting in on the MBS action, did you?). The Tsy program expired at the end of 2009, and the portfolio steadily shrinks from principal payments (which accelerated since summer 2010 b/c of tanking mtg rates). So, going forward, it's mainly student loans upping this line, but one has to consider the MBS purchases for the 2009 and 2010 fiscal years.

See pages 64 to 67 of the budgets:


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