Happy New Year, Federal Debt!

October 1st marks the first day of a new fiscal year for the federal government. What New Year's resolutions might it propose?

At the rate it's going, a reduction in the national debt won't likely be on the list. The proposed $700 billion bank bailout would require the U.S. government to raise its debt ceiling from $10.6 trillion to $11.3 trillion.

But it's not clear what kind of impact--if any--this effort would have on the national debt clock near Times Square that's about to run out of digits. The current debt stands at nearly $9.8 trillion, and the clock isn't equipped to go to ten. (Who owns the debt? Go here for an interactive.) The national debt (how much we owe) raises as the national deficit (how much more we spend than what we bring in) increases.

How is it possible that such a tremendous payout won't amount to much on paper? It's all about accounting.

According to the Congressional Budget Office, the government won't account for the gross outlay of the $700 billion asset purchase in its budget. Instead, it will account for the net cost minus the "expected value of any estimated future earnings from holding those assets and the proceeds from the eventual sale of them," according to testimony by the C.B.O.

No need for mark-to-market accounting here! If the banks were allowed to account for the estimated future value of these things, we might not have gotten into this mess at all. But Wall Street regulators believe that the more accurate reflection of assets--what the market believes their value to be today--provides a more relevant picture of a firm's financial health.

It won't likely end up being a break-even venture, however. C.B.O. director Peter Orzag explains on his blog (yes, bureaucratic bean-counters blog, too!) that the net cost of this plan to the government, including its administrative costs, "is very likely to be substantially smaller than $700 billion, but it seems likely to be greater than zero."

Of course, there are many unknowns in the plan (not the least of which is whether it will happen at all). How will the government assume the future earnings from the sale of these assets? What will the government pay for this toxic waste? Surely some distressed investors would like to know.

But it's easy to make things look pretty on paper, so perhaps the federal debt does have reason to celebrate this new year. We're sure that China will be happy to join in for a toast.

by Megan Barnett

Photograph by Brent Murray

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