BY JOHN MAULDIN
The US government on-budget deficit was $100.5 billion in October. It was $63.2 billion in the same month a year earlier. I see little hope it will reverse.
There is no appetite in Congress or the public for lower spending. Nor will we see the kind of tax policy changes that would generate more revenue.
Federal debt has grown with little complaint (except from a few of us curmudgeons) because it was mostly painless over the last decade.
Interest rates and inflation were historically low, and the Federal Reserve was buying Treasury bonds by the truckload.
Those helpful factors are now changing.
Debt Servicing Costs Will Soon Surpass Defense Spending
Last year, interest on the federal debt was $263 billion, or 1.4% of GDP. The Congressional Budget Office expects it will rise to $915 billion by 2028, or 3.1% of GDP.
Let’s stop right there for a minute.
The total projected 2028 deficit (on and off budget) is $1.5 trillion. Take that number with a grain of salt. They were only projecting the total debt for this year (2018) to increase $779 billion, when it actually rose $1.2 trillion including off-budget items.
The CBO also assumes no recessions, wars, or other crises in the next 10 years.
And yet they still project, even with optimistic assumptions, that interest on the debt will overtake defense spending plus other “discretionary” expenses.
It is quite likely that fiscal 2019 will see a $1.5 trillion deficit (assuming no recession), and that if (when) we have a recession, total debt will increase at least $2 trillion a year.
Given today’s $23 trillion of total debt, it’s very likely that by the mid-2020s we will have $30 trillion worth of debt—and see that $915 billion interest expense projected for the end of the decade.
But that’s not all.
Look back at my June 29, 2018 “Unfunded Promises” letter for some staggering numbers on the various non-debt obligations that our political heroes have placed on “We the People” beyond Social Security and Medicare. They’ve made lots of other guarantees, explicitly or not.
This Is a “Comorbid” Situation
Physicians have an unpleasant-sounding term called “comorbidity.” It is as bad as it sounds. It is when two separate health conditions affect a patient simultaneously.
They might be related but are medically distinct problems. Heart disease and diabetes often go together, for example. Evaluating them separately is important in making treatment decisions.
Such is the case with our debt disease.
- We have a big problem with private-sector debt, with many overleveraged corporations likely to default if the economy weakens.
- We have another big problem in government debt and unfunded liabilities, with politicians making commitments the taxpayers can’t keep.
Both problems are serious. To some degree they overlap, because the government draws its funding (whether taxes or borrowing) from the same population and wealth pool as private borrowers.
But they are distinct problems we should analyze separately.
There may be at least a little bit of good news in this. Since these are distinct problems, maybe they won’t explode at the same time. That would make each one more manageable.
But here’s the thing.
At some point global government debt grows so large that merely rolling it over becomes a problem. The government will hit a debt wall and probably drag private debt down, too.
That will lead to what I think of as a worldwide debt default I call The Great Reset.
The Government Will Resort to Measures that Sound Insane Today
As The Great Reset unfolds, the government will resort to “unusual actions.” Like Congress authorizing the Federal Reserve to buy Treasury debt. That will not seem as crazy then in the midst of crisis as it sounds now.
The Bank of Japan is doing it right now. The BOJ has well over 140% of Japanese GDP on its balance sheet. It is now, like the Swiss National Bank and the ECB, buying equities and private debt in order to push money into the economy, with seemingly no consequences.
And so maybe that’s what the US will do.
But once politicians and voters realize they can tap the central banks, will there be any motive to balance the budget? Maybe not, unless monetizing the debt creates yet another crisis. Like high and rising inflation? Which leads to the stagflation of the 70s. Which those of us who went through it before know is decidedly not fun.
It is very difficult to predict the path The Great Reset will take.
We can’t know what the political environment will be as technology begins to eat into the employment rate.
Will increasing productivity reduce consumer prices or will inflation rise? If it’s the latter, will the Fed react by raising rates and trigger a Volcker-style recession? Will Congress order the Fed to monetize the debt?
2008 clearly showed that Congress and the executive branch will do almost anything in the midst of a panic to avoid accepting pain. But in economic jargon, that yawning government debt chasm will have to be “rationalized.”
Retirees and others receiving government benefits will expect to keep receiving them. There is no political will to reduce those benefits. The money will be found; the question is where?
When you begin to “wargame” the problem, the options are both limited and severe.
Japan’s experience of Japan, even though it is apples and oranges to the US and Europe, will be so enticing. Just authorize the central bank to print money.
When the world’s two main currencies begin to monetize debt at a significant rate—and when that world is in a global recession, which is by definition deflationary—what will the consequences be?
The answer is we don’t really know. We only have economic theory as a guide, and we know how theory works in a crisis.
I will admit that I have trouble imagining that whatever happens will be less than painful, no matter which theory you adhere to.
Dealing with too much debt, even debt of the “merely” promised kind, always involves some kind of pain to someone, and more likely to everyone, leaving nobody happy.