There are warning signs about the US fiscal position and the national debt

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Today a story which was all the rage around 6 months ago has come back to the surface as the Financial Times has led with this.

The US faces a Liz Truss-style market shock if the government ignores the country’s ballooning federal debt, the head of Congress’s independent fiscal watchdog has warned.

To be fair to the head of the Congressional Budget Office he knew how to trigger the Financial Times via mentioning Liz Truss and that of course gives us an echo of the autumn of 2022. I am not so sure that the Financial Times has thought through the implications of suggesting that President Biden has been as reckless as it considers Liz Truss to have been,

Phillip Swagel, director of the Congressional Budget Office, said the mounting US fiscal burden was on an “unprecedented” trajectory, risking a crisis of the kind that sparked a run on the pound and the collapse of Truss’s government in the UK in 2022.

Actually there are a couple of problems with that analogy. First last week we saw another phase of US Dollar strength and whilst it can fall as the reserve currency with commodities priced in it the situation is different to any other currency. Presidents serve a term and whilst they can lose Congress they do not get replaced until then.

Debt Costs

We get to the meat of the issue with this bit.

The US was “not there yet”, he said, but as higher interest rates raise the cost of paying its creditors to $1tn in 2026, bond markets could “snap back”.

There are all sorts of issues with stating a debt cost for the future like that as the CBO behaves like the UK Office for Budget Responsibility. You do not know what bond yields will be? Inflation? Fiscal Policy (especially post election)? But the trigger here is the big figure change in the use of $1 trillion which is a lot even in these inflated times.

However some think we are already there.

US national debt stands at $34.6 trillion, with an annual budget deficit of approximately $3 trillion. Congress recently approved an additional $1.2 trillion in spending, laden with pork and earmarks. The interest on the debt alone exceeds $1 trillion per year, constituting around 20% of the government’s annual revenue. ( @BigBreakingWire)

According to them we are already there and I think I have spotted the difference which the Financial Times has rather tripped over.

According to the CBO, the US’s federal debt pile amounted to $26.2tn, or 97 per cent of gross domestic product, at the end of last year.

The US $8 trillion plus difference in the two measures of the Federal debt pile is because the CBO does not count the holdings of the US Federal Reserve. That has all sorts of implications for how you treat both QE and the large losses made by the Fed. But let us return to the debt costs situation.

If US government debt averages 4% across the weighted duration spectrum, that would be about $1.4 trillion in annual interest expense. At $50 trillion in debt (which this will get us there quickly), it’ll be $2 trillion in annual interest expense. ( @LynAldenContact)

We went from US $1 trillion to 2 trillion rather fast. But what that illustrates is my analogy in the past of debt costs being like a snowball rolling down a hill.Nothing much happens then it gets quite a bit larger or in musical terms Paul Simon was on the case.

Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away.

This brings me back to my opening point about us being here around 6 months ago as it was in mid to late October that the US ten-year yield nudged above 5%. That meant that things were slip-sliding away rather faster than the present 4.24%.

At the risk of frightening younger readers I can recall a time early in my career when the UK had a Long Gilt yield of 15% and things slipped away at quite a rate in debt cost terms.

Fiscal Policy

This has clearly been a player in recent times although the Financial Times tries to find a past scapegoat.

It shot up after sweeping tax cuts by Donald Trump in 2017 and huge stimulus spending during the pandemic. Trump has pledged to renew the tax cuts, due to expire next year, if he defeats Joe Biden in this year’s presidential election.

Of course The Donald has all sorts of debt problems but that rather turns a blind eye to the policies of Treasury Secretary Yellen and President Biden.

The CBO’s forecasts show deficits hovering at about 6 per cent over the next 10 years — and are based on the planned expiry of the Trump tax cuts in 2025.

That is not very different from the deficits of the Biden era as according to the IMF they have been in the mid to high 5 per cents. But the Financial Times chooses to ignore present policies and instead focus on definitely maybes.

The Committee for a Responsible Federal Budget, a think-tank, said that if Trump renewed the tax cuts it would add another $5tn to the federal debt between 2026 and 2035.

Issuance

Sometimes a chart is more eloquent than words.

There are technical factors in the swings around Repos and Reverse Repos. But there is a simple message in issuance being back at the peaks and if we look at the detail there is more.

The US has shifted its deficit funding to short-term debt issuance, something most people in markets link to the fall in long-term Treasury yields since Oct. 2023. No one in the G10 remotely comes close to this shift. Canada is most similar, but debt issuance is much smaller… ( Robin Brooks )

So there is a technical reason why there is so much issuance in that some of it is rolling over maturing (short-term) debt. Regular readers will be aware that should you have a fiscal crisis that is exactly the sort of thing that will exacerbate it.

This would not help in a crisis either.

According to the Federal Reserve and U.S. Department of the Treasury, foreign countries held a total of 7.4 trillion U.S. dollars in U.S. treasury securities as of April 2023. ( Statista.com)

Comment

As you can see there are various warning signals about US fiscal policy and national debt. But missing from the analysis above is another important factor which is economic growth. I have regularly pointed out in the past that UK Budget projections used to assume 3% annual GDP growth because pretty much anything looks affordable at that rate of economic growth. So in a sense the US played a form of economic debt Joker in 2023 as it achieved that. That,however, begs the question of what happens if growth slows or even worse the feared recession turns up? Suddenly all your variables get worse at once.

Let me also address the CBO which has its uses but has many of the problems of the UK Office for Budget Responsibility. It is also consistently wrong and we can file this in our recycling bins.

Swagel’s remarks to the FT came a day after the independent watchdog issued new longer-term economic projections, which showed debt levels rising to 166 per cent of GDP in 2054.

It will be a result if it is right in 2024 let alone 2054!

But there is more.Because this is the pre election period and one way of making this look better is to have some interest-rate cuts to flatter the numbers. Or is that too cynical?

14 thoughts on “There are warning signs about the US fiscal position and the national debt”

  1. No doubt 100 years ago there were politicians and commentators fretting over the ‘unsustainable’ public sector debt and warning that it would leave a terrible burden on their children and grandchildren.

    25yrs ago, their children were doing exactly the same thing, and 25yrs after that so were their grandchildren. Now we have their great grandchildren sounding the same warnings. You would have thought they might stop and ask themselves what happened to that terrible burden their fathers, grandfathers and great-grandfathers were warning would be visited upon them.

    Reply ↓

    • Hello Robert,

      I see you’re back with your “no amount of government debt is a problem” theme, so as the US debt is growing exponentially faster than the GDP that will eventually pay it, in the absence of an economic boom in the near future, exactly how is this sustainable?

      Reply ↓

      • I think there is a burden, but due to inequality (of income, wealth and opportunity) the burden isn’t shared equally. It’s pretty terrible for the bottom 10%, for the top 1% not so much.

        We could forever debate inflation, monetary policy, the Nixon Shock and the advantages and disadvantages fiat money, and whether the debt burden is unsustainable or not; but the sad fact is for too many people life is a struggle.

        Reply ↓

  3. Owe the banks $262, lose sleep about it.

    Owe the banks $26.2m, let them lose sleep about it.

    Owe the banks$26.2tn, let the populace lose sleep about it.

    Reply ↓

  4. The US economy is a runaway train now, totally out of control. Inflation is acclerating IMO, and Powell is talking about rates cuts! We all know interest rates don’t cause inflation, the expansion of the money supply does, but this is not what is needed now. I pointed out a while back the sickening speech he gives before every resentation, where he says they are guiding policy to look after the little guy, the average American and faimly, well just why does he do it, no one believes his lies anymore, the video below even mentions this.

    Agricultural commodities are soaring in price, cocoa has quadrupled in the last year,gold and silver are soaring as more and more people realise this is the end of the game and never ending money printing is the result.

    Interest rates are way BELOW the rate of inflation – measured by Shadowstats the way it was in the 1980’s, they calculate it to be 9.8%!!!, so interest rates at this level are making it worse for the average American family, but Powell can’t raise rates as the government would then be unable to pay the interest on its existing debt, the stockmarket and the bond market would go down, and people hanging on by a thread, literally millions of them living hand to mouth every month, barely able to afford food, would go under, but if he cuts rates infaltion is going to get even worse – so what happens to those on the brink then? Enter UBI – more debt will then be required to pay for UBI – which will make the dollar go down and commodities cost even more – a perfect vicious circle. I wonder how the 785 economists at the Fed didn’t see that one coming?

    A principle culprit in this is Biden and his “Bidenomics”, borrowing trillions to hose the economy with money to give the illusion of growth, this has led to a term called “Fiscal Dominance” whereby no matter how restrictive the Fed gets with interest rates or QT, the amount of money being created by government borrowing exceeds it and still provides a massive stimulus.Add on to that all the other stimuli like the Yen carry trade, the Fed preventing the stockmarket from falling means we now have a stockmarket so red hot and out of control it is going soon have a massive pullback – the $64 trillion question(the Fed’s likely balance sheet in a few years time) is Powell going to step in and save it again? If not watch out down below. I think there is only one way to stop this insanity and that is for him to announce he is RAISING rates, but of course he can’t do that either as Yellen won’t let him – because it would harm Biden’s election prospects and make further borrowing impossible to pay back, not to mention also crashing the stockmarket – so that’s off the menu as well.

    I also recently pointed out how corrupt our statistics were counting the BORROWED money the government is using to pay for millions of illegal immigrants ends up being counted towards GDP, well exactly the same thing is happening in the US, over 50% of the jobs recently created were government jobs, and most of them were working to process or give benefits to those immigrants – which is also like here, adding to GDP, sorry – I thought our current government was CONSERVATIVE???

    Reply ↓

    • Hi Kevin

      The problem with the Shadowstats numbers is that they represent a world ( the 1980s) which no longer exists. The wifi I am using right now did not exist and laptops have improved vastly. Yet we both know that the official CPI numbers are flawed of which the clearest is the way that a third of it is rents both actual and imputed.

      As you know I would put house prices and mortgage costs in it as after all people pay them! But of course the official view is that they prefer theory to reality.

      Reply ↓

    • Moved from Covid lockdown to “Climate Lockdown”, just as bogus and just a test of the response and the fight back/resistance from the public, if they accept it – as they will – they will roll it out in other cities and move to the next stage, there is no opposition anymore, they are free to impose anything they like – and they know it.

      Of course it will eventually be our food that is used as a weapon against us(after car travel and jet ravel for holidays) is deeemed damaging to the climate and banned, the British sheep will take anything, meekly obeying.

      I wonder if the men fighting in WWI and WWII saw what is going on today, would they continue fighting for this?

      So why don’t people today fight back?

      Reply ↓

  6. Pingback: The US grapples with mounting debt and political tensions, signaling potential market turmoil ahead. – NewZealand Times

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