Note: I am not an expert on the Fed or the operation of the money supply. Let me know if I am missing something fundamental below
Kevin Drum dredges up this chart from somewhere to supposedly demonstrate that only a little bit of spending cuts are needed to achieve fiscal stability.
Likely the numbers in this chart are a total crock - spending cuts over 10 years are never as large as the government forecasts and tax increases, particularly on the rich, seldom yield as much revenue as expected.
But leave those concerns aside. What about the Fed? The debt as a percent of GDP shown for 2012 in this chart is around 72%. Though it is not labelled as such, this means that this chart is showing public, rather than total, government debt. The difference is the amount of debt held by federal agencies. Of late, this amount has been increasing rapidly as the Fed buys Federal debt with printed money. Currently the total debt as a percent of GDP is something like 101%.
The Left likes to use the public debt number, both because it is lower and because it has been rising more slowly than total debt (due to the unprecedented growth of the Fed's balance sheet the last several years). But if one insists on making 10-year forecasts of public debt rather than total debt, then one must also forecast Fed actions as part of the mix.
Specifically, the Fed almost certainly will have to start selling some of the debt on its books to the public when the economy starts to recover. That, at least, is the theory as I understand it: when interest rates can't be lowered further, the Fed can apply further stimulus via quantitative easing, the expansion of the money supply achieved by buying US debt with printed money. But the flip side of that theory is that when the economy starts to heat up, that debt has to be sold again, sopping up the excess money supply to avoid inflation. In effect, this will increase the public debt relative to the total debt.
It is pretty clear that the authors of this chart have not assumed any selling of debt from the Fed balance sheet. The Fed holds about $2 trillion in assets more than it held before the financial crisis, so that selling these into a recovery would increase the public debt as a percent of GDP by 12 points. In fact, I don't know how they get the red line dropping like it does unless they assume the current QE goes on forever, ie that the FED continues to sop up a half trillion dollars or so of debt every year and takes it out of public hands.
This is incredibly unrealistic. While a recovery will likely be the one thing that tends to slow the rise of total debt, it may well force the Fed to dump a lot of its balance sheet (and certainly end QE), leading to a rise in public debt.
Here is my prediction: This is the last year that the Left will insist that public debt is the right number to look at (as opposed to total debt). With a reversal in QE, as well as the reversal in Social Security cash flow, public debt will soon be rising faster than total debt, and the Left will begin to assure us that total debt rather than public debt is the right number to look at.