That crazy ole relationship between debt and deficit

By Dian Vujovich

Litman Gregory is a California-based asset management company. Its founders,
Ken Gregory and Craig Litman, began the firm in 1987 and today manage over $6 billion in assets. In addition to making a number of high-net-worth individuals quite pleased, the firm also publishes the well-respected “No-Load Fund Analyst” newsletter.

In the June 2010 issue of that newsletter, a piece titled” The Relationship Between Debt and Deficit” appeared. It was highlighted in a box and offered a relatively simple explanation of that relationship.

Since people from the streets to the boardrooms, in the media and TV talking heads all around the world seem to have their undies in a bundle about those two “d” words, I thought it might be helpful to share part of what was in that piece. Here’s a portion of the sidebar:

“The Relationship Between Debt and Deficit

The federal “deficit” is the amount by which government spending exceeds revenues in any given year while the federal “debt” represents the total amount of outstanding borrowing—- or the accumulation of past budget deficits. The annual budget deficit normally equals (or is close to) the difference between debt outstanding at the beginning of the year and debt outstanding at the end of the year (it may not match exactly in years when certain other means of financing are used).

The media often cite the deficit-to-GDP ratio because it reflects the spending decisions of our current elected officials, (i.e., their fiscal discipline or lack thereof) but does not include the impact of previous years. It can also be dramatic: the fiscal stimulus implemented over the past two years cause the annual deficit to triple from just 1% in 2007 to 3.2% in 2008 and almost 10% in 2009. Still, it is important to consider the cyclical nature of that increase. The stimulus was driven by the current economic cycle and as the economy recovers, spending in excess of revenues will likely decline as a percentage of GDP. One can debate how low it will be go but CBO projects the deficit falling to 2.6% of GDP by 2015….”

Yes, there’s more to that story, particularly since it was published 14 months ago, but some simple truths remain. For instance, that annual budget deficit and the debt ideally might not always be equal to one another but ought not be miles apart; economies aren’t stagnant but cyclical; things change; and projects are just that—projections.

In this most recent Washington mess our elected officials have preferred politicking to problem solving and canned compromising and cooperating. As a result, to many inside and outside of our borders the US looks like a country of buffoons. Of course that’s not the first time that’s happened nor will it be the last.

All American’s, however, will feel the price of this buffoonery as the costs on many things go up, assorted taxes and fees are implemented and interest rates rise. That said, all of that was going to happen anyway.

I was at a party the other night and a woman said to me: “I never thought I’d see the day when two boxes of breakfast cereal would cost over 10 bucks.”

To which I added, ” And those boxes weren’t even full.”

And there you have it: debt and deficit in a box.

(Info about “No Load Fund Analys” at http://www.nlfa.com )