There are plenty of ways to tally up the US government’s federal debt. The total Treasury debt outstanding was about $16.74 trillion at the end of July. But the US owes about $4.84 trillion to itself, mostly in the form of debt that is issued to entities such as the Social Security trust fund. So many analysts tend to focus on the $11.91 trillion in debt that is publicly available to be traded.
As we noted earlier this week, the recent revision of US GDP—which boosted the size of the world’s largest economy by about $590 billion in 2012—instantly shrank the debt-to-GDP ratio to less than 70%. That debt load looks downright manageable if you compare it to burdens on the books of troubled European countries, for example.
But that’s just the stuff that’s “on the books.” Like many countries, the US has large stockpile of potential and actual liabilities that don’t show up on as actual debt outstanding. In fact, a new working paper by University of California-San Diego economics professor James Hamilton estimates that the US was on the hook for more than $70 trillion in off-balance sheet liabilities at the end of 2012. Yes, trillion.
How is that possible? Well, here’s Hamilton’s tally.
Housing related commitments
- $6.112 trillion—Debt of government sponsored entities such as Fannie Mae and Freddie Mac, the mortgage buying government-sponsored entities that the US was forced to fully nationalize during the financial crisis.
- $1.408 trillion—The notional value of the mortgages that the government-sponsored entities packaged up and sold off to investors after “guaranteeing” them. In other words, the amount that the housing agencies agreed to pay investors if those mortgages went bad and homeowners defaulted. Obviously, it’s unlikely that they all go bad at once. But if you want to be conservative, it makes some sense to look at them as a whole.
Student and other loan guarantees
- $325 billion—Hamilton’s estimate of the amount the US is on the hook for guaranteeing student loans and other government-backed lending such as small business loans and loans from the Export-Import Bank of the United States.
- $7.406 trillion—The value of the deposits insured by the Federal Deposit Insurance Corp., the government scheme aimed at preventing small depositors from losing their money in bank collapses. The FDIC is funded through fees on member banks. And its deposit insurance fund was roughly $33 billion at the end of 2012. That’s a pittance compared to all of the deposits the US insures. But, it’s also unrealistic to think that the country’s entire banking system would go bust at once. Essentially, in a near-impossible worst-case scenario, the Feds would be on the hook for this much.
The Federal Reserve
- -$1.128 trillion—As a quasi-independent arm of the federal government, the Fed’s actions do have implications for the US government’s shadow balance sheet. For instance, during the financial crisis, as the Fed lent out money to quell the crisis, it drove shadow liabilities up by roughly $1.13 trillion between 2006 and 2008. But as those lending programs have been wound down, the Fed has basically been cutting the size of the government’s shadow balance sheet. In 2012, the Fed’s share of the shadow balance sheet decreased by $1.128 trillion.
- $26.5 trillion—This giant figure represents the net present value—in other words the amount of additional cash the Social Security Administration would need to sockaway in steady investments today—to pay for the all benefits participants will be entitled to later.
- $27.6 trillion—Likewise, this the best guess as to the “present value”—or how much more cash would have to be invested now—to pay for all the Medicare-related costs government actuaries expect older Americans to incur in the future.
Other government trust funds
- $1.86 trillion—An estimate of the possible liabilities the government faces for a range of spending on other trust funds such as the Civil Service Retirement and Disability Fund and the Military Retirement Fund.
Does this staggering amount of debt spell imminent doom for the country? Not really. As we’ve said before, it’s highly unlikely that the US would have to come up with all of this money at any one time. Nor are all of these costs absolutely going to happen as actuaries predict. For example, if the US really doesn’t have the money to pay for all of the Social Security benefits retirees are entitled to in a few decades, those benefits could be trimmed then, or other alterations could be made to the program—such as pushing the retirement age back, which would cut the costs of the program.
On the other hand, it is important to remain cognizant of the fact that the US government—and most other governments of large advanced economies—are usually on the hook to pay for many things that don’t show up on the annual budget. Of hazy liabilities, Hamilton writes: “Acknowledging their size is a necessary first step for making wise policy decisions.”