Debts and Deficits

There has been an increasing amount of anxiety voiced about America’s annual federal budget deficits and growing debt and, understandably so.

Annual deficits in fiscal 2023 and 2024 are $1.7 (official) and $1.6 trillion (estimated), respectively, while the national debt has topped $34.5 trillion, yet another all-time high.

There appears to be a growing worry that at some point, possibly in the relatively near future, the U.S. will have trouble servicing the national debt.

The precipitous rise in official interest rates, engineered by the Federal Reserve in a post-pandemic economy, has pushed the U.S. debt service burden to an estimated $870 billion in the current fiscal year (2024), a sum that exceeds the defense budget.

And that comes at a time when the Federal budget, itself, continues to rise as President Biden’s proposed budget for the upcoming fiscal year calls for spending of $7.3 trillion, a staggering sum, with the budget deficit rebounding, from the two prior years, to $1.8 trillion, assuming it would pass intact.

The nation’s debt has ballooned in recent years owing to former President Trump’s unfunded $1.7 trillion tax cut, massive spending to fight the ill-effects of the pandemic, undertaken by both Presidents Trump and Biden, and by additional fiscal stimulus past by the current occupant of the White House.

Taken together, America’s debt-to-GDP ratio has risen to a peace-time high of 121.6%, according to the St. Louis Federal Reserve, down a bit from when it hit 132.9% at the very depths of the pandemic.

The last time the debt-to-GDP ratio was anywhere near this high was immediately after World War II.

While that number is eye-popping, it is not the largest disparity between debt and GDP in the world.

China’s ratio is nearly 288%, when one considers all the debt the Beijing is responsible for … including its federal debt,  municipal debts and the debts of state-owned enterprises.

(https://asia.nikkei.com/Spotlight/Caixin/China-s-debt-to-GDP-ratio-climbs-to-record-287.8-in-2023)

Japan’s debt-to-GDP ratio is 255%.

Other countries have similarly large ratios but are smaller players on the global stage.

What I find most interesting is that while all the chatter about debt and deficits points to problems, or future problems in the U.S. funding and servicing its heavy debt load, few talk about the burden facing two of the other largest economies on the planet.

They have ample economic issues that could make them even more vulnerable to a funding crisis than the U.S.A.

I also find it quite telling that the U.S. Treasury market is not showing signs of strain amid all that concern.

The yield on the 10-year Treasury note is currently around 4 ¼%. That is well below the historical average of 5.86%, as measured since the 1960s.

It’s true that bond yields in other heavily indebted countries are lower, but that’s owing to much slower growth rather than the U.S. paying a significant premium to borrow money.

Faster growth in the U.S., in both absolute and relative terms, has put a floor under bond yields.

Given that, and current concerns about the risk of inflation reaccelerating, or the Fed delaying expected interest rate cuts, the U.S. bond market is behaving surprisingly well, especially if you consider all of the handwringing over U.S. debt and deficits.

It is true that heavy issuance of U.S. Bills, Notes and Bonds may have pushed rates up a bit, but they tend to drop back down after the Treasury finishes selling a pile of debt.

This is not to say that I am unconcerned about the budget process in the U.S., or the unwillingness of our elected representatives to address both the yawning budget gaps and the massive unfunded liabilities of the federal government … far from it.

There needs to be a rational, bi-partisan effort to reign in spending, narrow the gap between revenues and expenditures and, carefully, reform entitlement programs to ensure their viability for future generations.

There will, sometime in the future, be a day of reckoning for dealing with rising debt and deficits among heavily indebted nations.

They key question though, in a world awash in debt, is who must pay the piper first?

My guess is that the U.S. won’t be first country to suffer a funding crisis.

In fact, perversely, it may actually be the beneficiary of one as the world rushes to the relative safety of U.S. debt amid funding crises overseas.

Hope springs eternal. One must hope that our funding capabilities are eternal as well.