The USA's debt burden, according to the TIT Ratio
Because of the growing hysteria over the growing federal debt, I've decided it's time to introduce a new, objective measure for our debt burden — or, more accurately, for our federal government's ability to afford the federal debt. [Believe it or not, it's more affordable today than it was ten years ago.]
The publicly-held debt has been increasing rapidly because of recent actions by the Treasury and the Federal Reserve, and it will continue to increase rapidly until we get our economy moving again. The question is this: Can we afford all this debt, on top of the debt we already had on the books?
Well, that begs the question, How should we measure "debt affordability"—also known as "creditworthiness"? Few of the hysterical debt-phobes ever seem willing to answer that important question. Although ex-Comptroller General David Walker offered a ray of hope by touching briefly on the debt/GDP ratio in his doomsday movie, IOUSA (see my review here), my hopes were dashed when he devoted most of his film to the more sensational debt numbers ending in lots of zeroes. Too bad, but that's symptomatic of debt phobes — especially those who'd rather peddle fear, for personal or political gain, than solutions for aggregate economic gain.
Anyway, I think I've come up with a simple little number that could help steer the conversation away from hysteria, back towards objectivity: I call it the "TIT Ratio," which stands for "Times Interest Taxed." (I mentioned it at the end of my review of Walker's IOUSA movie.) It's simply the number of times our federal tax receipts covered the interest obligations on the publicly-held federal debt.
I like it a lot better than the debt/GDP ratio because it's more to the point. In debt/GDP, debt (a "stock") is just a crude proxy for interest payments because it ignores the interest rate, and GDP (a "flow") is just a proxy for tax receipts. In contrast, the TIT Ratio is a coverage ratio that directly measures interest payments and tax receipts (both "flows"), and it's more timely. It's similar in concept to "Times Interest Earned" used in private sector finance as one gauge of a firm's creditworthiness. Here's a chart of the USA's TIT Ratio since 1998. [I plan to take it back to at least 1980, if I can get the Treasury folks to point me to their older reports.]
[source: Monthly Treasury Statement]
Notice that our current ability to afford the federal debt is better than it was at the end of 2000 — even though we've been adding debt at a fast pace recently. (Reasons: our economy has grown, and the interest rates have dropped.) The good news today: we have lots of room to borrow because there are plenty of investors willing to buy Treasury securities at low interest rates (near-zero rates, in fact). The bad news: nobody should interpret that to mean we have infinite borrowing capacity (as opposed to merely a comfortable cushion with no near-term limit in sight).
Federal debt: the principal, the interest, and the market
Keep in mind that (1) we'll never, ever have to pay back any of the principal on the debt if we just keep rolling it over (see this article); (2) the interest is the "debt service" we must never, ever, ever, ever default on; and (3) maintaining our status as the large, reliable, predictable borrower supporting the large, liquid, worldwide market for US Treasury securities should always be one of our top financial priorities. To maintain the bond-buying public's confidence that we'll always be able to afford to pay them their interest in stable-value dollars, and to roll the debt over into a large market full of willing buyers, the proceeds from the taxing power of the federal government must comfortably cover our interest obligations. Hence the TIT Ratio.
Growing the economy
Federal tax receipts grow when the economy grows, even when tax rates do not change at all. That's why "growing the economy" is so important for our future, and why getting it back on track is so much more important than worrying about short-term increases in the debt level. [Along those lines, I'm glad to hear Obama and his team now giving "growing the economy" a lot more emphasis than increasing anyone's tax rates; tax hikes for the rich now appears to have been merely tax talk for the votes—at least until 2010. I find that very encouraging.]
So far, the USA's declining TIT Ratio is saying that the debt we've added, in spite of the ratio's downward slope, is more easily affordable today than our debt level was a decade ago. [That's worth repeating: "The debt level is more affordable today than a decade ago." Try to think of anywhere else you've heard that besides this blog.] We should expect the decline to continue for months, but we should patiently understand that it's necessary to get the economy back on the growth track, and that it's therefore not yet cause for alarm, let alone doomsday talk.
In short, it's a level-headed, objective measure. For me, that's a nice respite from the caterwauling of the hysteria peddlers.
[I'll begin publishing the TIT chart once a month, soon after the Monthly Treasury Statement is available. Also, it's safe to assume that, for now, a bigger TIT is a better TIT, but don't forget that too much of a good thing is bad, not good. If the TIT ratio approached infinity, as it would if we eliminated the debt, we would be grossly underleveraged, and would be stifling economic growth.]
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Last and possibly least...
Two years ago, I posted the graphic below in an article I wrote responding to the fear peddlers' road show. [You'll get the joke if you saw the movie Bill and Ted's Bogus Journey; if you missed it, that's too bad, because it was one of Keanu Reeves' finest performances.]
Anyway, David Walker and the Concord folks never gave me any feedback on it, so I guess they didn't think it was funny.
Here's the Bill & Ted graphic, just for fun.
That's really too bad. The peddlers of the fiscal doomsday message have found a lapdog. Beck's interviews reminded me of the way Olberman interviewed Obama, or the way Hannity interviewed Palin. Hard-nosed journalism is supposed to ferret out the truth, but what I'm seeing these days looks more like slow-pitch softball. 


Myth #1 is still the all-time champion political falsehood—way, way ahead of "pristine" Rocky Mountain water. Just ask President Bush. Just ask any presidential candidate still in the running, on either side. In fact, Myth #1 is a good bet to outlive the cockroach, which has been around for 350 million years.
We should tax the private sector sufficiently to free the resources that we find desirable for the government to command, but no more than that. This is likely to entail a stable debt/GDP ratio in a growing economy.