The US deficit is up $590 billion so one might think total US debt would rise by that amount or at least something close to that amount.

Instead, total US debt for the fiscal year that just closed soared by over $1.2 trillion. What’s going on?

The shortest answer is “deficit lies”. The longer answer involves numerous off budget items like social security do not count towards the deficit but do count towards debt.

Lacy Hunt covered this topic in detail in the Hoisington Management Quarterly Review and Outlook Third Quarter 2016 (following snips via email).

From 1956 until the mid-1980s, the change in gross federal debt was always very close to the deficit (Chart 1). However, over the past thirty years the change in debt has exceeded the deficit in 27 of those years, which served to conceal the degree to which the federal fiscal situation has actually deteriorated. The extremely large deviation between the deficit and debt in 2016 illustrates the complex nature of the government accounting.


To better understand why there is a gap between the increase in the deficit with the change in gross federal debt, we examine a recently available breakdown and analysis of data on the federal budget deficit from Louis Crandall of Wrightson ICAP, which consists of the year-over-year change ending June 30, 2016.

The increase in debt for that period was over $1.2 trillion while the deficit was $524 billion, a near $700 billion difference. The discrepancy between these two can be broken down as follows (Table 1): (a) $109 billion (line 2) was due to the change in the treasury cash balance, a common and well understood variable item; (b) $270 billion (line 3) reflects various accounting gimmicks used in fiscal 2015 to limit the size of debt in order to postpone hitting the Debt Limit. Thus, debt was artificially suppressed relative to the deficit in 2015, and the $270 billion in line 3 is merely a reversal of those transactions, a one-off, non-recurring event; (c) $93 billion (line 4) was borrowed by the treasury to make student loans, and this is where it gets interesting. Student loans are considered an investment and therefore are not included in the deficit calculation. Nevertheless, money has to be borrowed to fund the loans, and total debt rises; (d) In the same vein, $70 billion (line 5) was money borrowed by the treasury to increase spending on highways and mass transit. It is not included in the deficit calculation even though the debt increases; (e) $75 billion (line 6) was borrowed because payments to Social Security, Medicare and Affordable Care Act recipients along with the government’s civilian and military retirees were greater during this time frame than the FICA and other tax collections, a demographic development destined to get worse; (f) Finally, the residual $82 billion (line 9) is made up of various unidentifiable expenditures including “funny money securities stuffed in various trust funds”.

As noted, these last four items discussed above (lines 4, 5, 6 and 9), which total $320 billion, fund activities and raise debt, but they are not in the deficit. Instead they are categorized as something else. Under the principles of economics, they are in fact cash expenditures that raise federal debt.

In the past ten years, the cumulative budget deficit was “only” $7.9 trillion, but the increase in debt was $10.9 trillion, a 38% difference. Using the same math, by 2025 the debt increase will be in the neighborhood of $13 trillion, based on the $9.2 trillion deficit increase projected by the CBO.

Textbooks Versus Reality

Textbooks have historically hypothesized that government expenditures lift economic growth by some multiple of every dollar spent through a positive government expenditure multiplier. As such, deficit spending has long been considered to be a positive for economic expansion. If the expansion lasts long and generates faster actual and expected inflation, bond yields should rise via Irving Fisher’s equation (Theory of Interest, 1930).

Impressive scholarly research has demonstrated that the government spending multiplier is in fact negative, meaning that a dollar of deficit spending slows economic output. The fundamental rationale is that the government has to withdraw funds, via taxes or borrowing, from the private sector, to spend their dollars.

Decelerating Economic Growth

From a fiscal and Keynesian perspective, 2016 should have been a year of accelerating economic activity. There was no crisis in passing the 2016 budget. There was a nonpartisan deal to accelerate military and civilian spending as well as a deal to hike outlays for highways. The increased expenditures and debt were going to occur after two years of slower growth in nominal GDP, which according to its advocates meant that the timing was right.  Nevertheless, the economy sputtered. This once again confirms the existence of a negative government spending multiplier.

A $1.4 trillion jump in federal debt was paired with both weaker economic growth and falling treasury yields. Unfortunately, the 2017 economic horizon is clouded by the rising likelihood of further increases in government spending and debt. The inevitable result will be slower economic growth and declining interest rates, a pattern similar to the 2016 experience.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

Fiscal Stimulus Theory and Reality

There you have it: the short explanation (lies), as well as the lie details.

In case you missed it, please note Treasury Receipts Up 1%, Spending Up 5%.

This already sorry state of affairs will get very ugly when recession hits.

Addendum: Note From Lacy Hunt

The first paragraph of the Hoisington quarterly report showed debt rising $1.4 trillion but the detail showed $1.2 trillion. I asked Lacy about the discrepancy and he pinged me back with this email …

Hi Mish,

The increase was $1.4 trillion for official fiscal year, but for the 12 months ending June 30 when we did the reconciliation the increase was $1.2 trillion.


Mike “Mish” Shedlock