Why Is the Annual Debt Increase Larger than The Deficit?

In the real world when you spend more than you earn and borrow money to cover the difference your debt increases by the amount you spent (and borrowed) over what you earned.


But the government doesn’t live in the real world and goes to great lengths to hide from you what it actually spends and how it borrows. Bureaucrats, congress, and the president are especially good at this.


Congress made a rule (they make a lot of those) that any increase in spending has to be offset by cuts elsewhere in the budget. But cutting (often referred to as the failure to increase spending) they say kills or starves people and is difficult to do. So neither Congress nor the government can spend more money openly but thinks it has spend more to satisfy constituent’s appetite for more stuff. So they borrow money on the sly, hide the cost  and the deception keeps everyone happy.


In order to accomplish what can be called deceitful (as opposed to deficit) spending, they keep two sets of books. Both sets are artfully cooked to hide the awful truth. You get to see the first set of books called the budget. It’s bad enough to scare anyone but the second set of books contains the Off Budget Spending. That’s the book that should but doesn’t scare anyone because you don’t see it. That’s the book that is really cooked and that they really don’t want you to look at easily without some hard digging.


What’s in that second Off Budget Spending book? First and foremost is Social Security. The cash that you and your employer send in every month passes through the Social Security Trust Fund only long enough to be converted from Trust Fund cash into IOUs in the form of Treasury Notes as it makes its way to the general fund where it’s spent willy-nilly like all revenues. The Trust Fund has no cash, you see, but that’s another story.


If the Social Security cash we all send in exceeds the amount paid out, that surplus goes in to the first book just like other tax revenue. If, as is the case now, the amount sent in is less that the Social Security payments (operating in the red) additional money to cover the shortfall is borrowed. This is off budget by law. The borrowing is  added to the debt but does not appear in the first book’s budget deficit because it’s in the second Off Budget book. Though it increases the debt it does not increase the deficit. Got that? More money borrowed and spent; no offsetting cut in spending and nothing is added to the deficit. It’s pretty slick. (spending up, deficit untouched, debt increased)


Likewise Fanny Mae and Freddy Mac are in the second off budget book. When they are profitable as they are now, they contribute $70-$100 billion to the first book reducing the deficit making it appear as though the good people writing the books are serving their countrymen by reducing the deficit. If they lose money as is expected in the future, borrowed money will make up the difference and add to the debt but not show up on the first book. It’s a win win for the deceivers. For now they reduce the deficit. Notice that the surplus is spent and does not go to reducing the debt. (spending up, deficit down, and the debt untouched)


Another off budget spending biggie is the “Overseas Contingency”. The cost of the Iraq and Afghanistan wars is off budget to the tune of about $85 billion. This is added to the debt but doesn’t showing up on the first book as deficit spending. (spending up, deficit untouched, debt increased)


More recently the $17 billion Veterans Bill was passed to make congress look good with $12 of the $17 billion spent off budget.  This additional spending adds that $12 billion to the debt but keeps it from showing up on the first book as deficit spending. (spending up, deficit untouched, debt increased)


That’s a few of the many ways they were able to report Fiscal Year 2014 deficit to be down to just under a half trillion dollars while the debt increase was double that at about a trillion in that same time frame. Note that in each case spending was up.


This past fiscal year the government borrowed and spent just about twice as much as it reported spending in the first book’s budget deficit. That’s how they can say they have done a great job of reducing the deficit. Here you see it there you don’t.


So the politicians proclaim the deficit is down, the economy is looking good, and you don’t have anything to worry about. Trust us. And if you like your insurance, you can keep it.


The truth is that the laws of economics are immutable. Like the laws of physics, you can’t wish them away. At some point reality steps in and there will be a reckoning.


When the debt grows to an amount so large that we can’t pay the bill, we will have reached the tipping point and the laws of economics will loom up and inexorably bite us in the backside and fix what the politicians failed to mend. That reckoning will be really painful.


The reckoning will come in the form of inflation as it did in the Weimar Republic of German when it took millions of Deutch marks to buy a loaf of bread or in the form of deflation as it did in the great depression.


Fix it now or pay the piper later. The laws of economics cannot be wished away.

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