Doylestown Wealth Management - LPL

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September 2018 Budget Commentary

Getting the Numbers to Add Up

 This commentary has remarked previously about the continuous mismatch between the reported federal deficit and the increase in the federal debt.  The mystery has now been solved thanks to help from two Congressional Budget Office alumni (thanks Ed and Jeff!).  First off, the disparity between debt and deficit requires adjustment on a year to year basis for changes in the federal government’s cash balance at the Federal Reserve (the government’s checking account as it were) and for the budget gymnastics which avoided penetrating the debt ceiling in fiscal years 2013 and 2015.  If we make these adjustments, the difference in reported deficit and the debt increase looks like this:

The second part of the discrepancy involves accounting for loans the federal government has made directly, primarily student debt, which has grown tremendously since the financial crisis.

In the last ten years, the federal government has become the 800-poubd gorilla in the student loan market.  While some may decry “government intrusion” in the financial markets, the plain fact is that Washington was already backstopping the private loan market because the default rate was so high that lenders were unwilling to proceed without a guarantor.   After all, if the government is going to be on the hook for the money anyway they might just as well make the loan themselves.  In any case, the federal government’s student loan portfolio has grown to over $1.2 trillion– money that has been borrowed by the Treasury and lent to students.  (One might believe that the government could make money by borrowing at low rates and lending at higher ones, but the default rate on the loans keeps this from happening.)


Since 2010, student loans outstanding has increased by roughly $100 billion annually.  This extra debt is rightly not considered part of the budget deficit, since the government is making loans which will presumably be paid back and reduce the need for future borrowing at some point in the future.  The exception to this is the “loan subsidy”—the amount of money the Treasury estimates it will lose on these student loans—which is included in the current budget.  This number fluctuates quite a bit, but generally speaking it is about $25-30 billion per year.  This leaves the Treasury with about $75 billion worth of “student loan” borrowing that isn’t reflected in the budget deficit. 

But even subtracting this $75 billion from the debt still leaves us with a $100 billion gap between what the government says its deficit is and what it borrows.  The numbers for the first eleven months of fiscal year 2017-18:


Total Federal Debt on August 31, 2018 $ 21,458,850,000,000
Total Federal Debt on September 30, 2017 $ 20,244,900,000,000
Increase in Debt $   1,213,950,000,000
Federal Reserve Account  on August 31, 2018 $       317,971,000,000
Federal Reserve Account on September 30, 2017 $       159,322,000,000
Increase in Cash Balance $       158,649,000,000
Net Increase in Debt $    1,055,301,000,000
Estimated “Student Loan” Increase $         75,000,000,000
Implied Budget Deficit $       980,301,000,000

Source:  Daily Treasury Reports


The last step requires us to use debt held by the public rather than total debt.


Debt Held by Public on August 31, 2018 $ 15,785,389,000,000
Debt Held by Public on September 30, 2017 $ 14,673,429,000,000
Increase in Debt $   1,111,960,000,000
Federal Reserve Account  on August 31, 2018 $       317,971,000,000
Federal Reserve Account on September 30, 2017 $       159,322,000,000
Increase in Cash Balance $       158,649,000,000
Net Increase in Debt $       953,311,000,000
Estimated “Student Loan” Increase $         80,000,000,000
Implied Budget Deficit $       873,311,000,000

Source:  Daily Treasury Reports

This matches up reasonably closely with the reported CBO number of $895 billion ($22 billion sounds like a lot but it’s only 0.5% of the budget.)  The important point to note is that the calculation only works if we use federal debt held by the public and not total debt, which adds on intergovernmental holdings composed mainly of the federal “trust funds”—Social Security, Medicare, military and civil service retirement, and the like.  The clearest indication that these “trust funds” are accounting fictions is that the debt/deficit calculation only adds up if we ignore the “debt” they hold.

 The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.