The United States just wrapped up their fiscal 2023 operations (Oct 1 to Sept 30) and the numbers weren’t pretty.
Yes, the economy didn’t go into recession like many were predicting. That’s a plus. But spending was up while revenues were down. That’s never a good thing, even if the government was running a surplus (which of course it isn’t).
So, let’s take a look at Fiscal 2023 and then we can look at estimates for the future.
You can see the deficit was roughly $1.7 trillion, but that includes a reversal of the student loan forgiveness that the administration booked for 2022 and had to reverse in 2023. That amounted to $333 billion in “less spending” in 2023, which if you take that out, the real deficit would have been around $2 trillion. Now that is bad enough, if it were only a one-off event. But the CBO projects an average of $2 trillion per year deficit over the next 10 years. That assumes no recession in that time period. See the chart below.
If that happened, aside from the COVID induced recession, we wouldn’t have a recession for 25 years. Maybe that’s possible, but I wouldn’t bet on it and I could only guess what kind of imbalances would accrue. We can also see on the chart above what the projection is for debt. What is shown is debt held by the public (as opposed to being held by another internal government department). Today that number is roughly $26 trillion. The total debt is closing in on $34 trillion.
As you can see above, the CBO estimates that total debt held by the public will be over $46 trillion (off the base today of $26T). Which would say that total debt would be well north of $50 trillion and possibly closer to $60 trillion by 2033.
Here is a chart of debt as a percentage of GDP. Keep in mind that this is only debt held by the public (not total debt).
And because that debt gets so large, here is what the CBO estimates for interest payments on that debt. It’s interesting to note that a 1% increase in interest means $400 billion extra in tax expenditures in 2033.
If I had to place a bet, I would say interest payments would be higher than projections. We shall see in the coming years.
I remember back in 2006/2007 discussing how government spending as a percentage of GDP needed to get back to historical averages. Back then it was around 23%-24%. Today, guess where it’s at? Yep around 23-24% (down from 30%+ during COVID). The sad part is we did reduce spending coming out of the financial crisis until COVID (see the chart below).
In addition to the increasing interest costs, we will see the cost of Medicare and Social Security double over the next 10 years.
If we are to get off this debt spiral, both revenues and expenses need to be addressed.
The Committee for a Responsible Federal Budget (have no idea if they are partisan) has a website where you can play with many different variables and see what happens to the deficit and the debt. If you want to play around with this, you can find the link here.
As I wrap this up, there is still one thing left unsaid.
My friends on the MMT (Modern Monetary Theory) side would say that debt and deficits aren’t a problem, as we can just print more money. It’s true we can print more money. However, printing more money causes there to be more debt, which (all other things being equal) would cause Treasury prices to go down and interest rates to go up. Now again, my MMT friends would say that’s not a problem, because we can just print more money. And that also is true.
But there will be a time when the appetite for investors wanes and there is a lack of demand for Treasuries. When that day comes, MMT has an answer for that too. The Federal Reserve can just buy all the debt. That would theoretically keep interest rates stable as there would always be a buyer for Treasuries. We have seen that play out already in Japan. As their Central Bank now owns more than 53% of all Japanese debt (see chart below).
And Government debt is a whopping 263% of GDP!
And yet interest rates in Japan are still set at 0.5% for a 10-year bond. This is the experiment that is on the table for the U.S., as well as most other developed countries. Will it work? Can central banks just buy most of the new debt and monetize it by printing more currency (or making a ledger entry of the same effect) and not pushing interest rates higher? You got me. So far everything is more or less holding together.
I do have some homework that was given to me by a client. Maybe I will be an MMT convert. I will let you know after I finish reading a couple books.
That’s it for me today. I hope you have a day. If you have any comments or questions, please feel free to reach out to us.