June 2023
“Increasing America’s debt weakens us domestically and internationally. Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.” Barack Obama
|
Item
|
YTD Change |
|
Dow Jones Ind Avg
|
-.72% |
| S&P 500 Index |
8.86%
|
|
EAFE Foreign Index
|
5.04% |
| Emerging Market Index |
.22%
|
|
Barclays Agg Bond Index
|
2.46% |
| 10-Yr Inflation Forecast |
2.20%
|
| Unemployment Rate |
3.7%
|
*Market index data as of 5/31/2023
It’s official; the debt ceiling deal passed both Houses and was signed by President Biden on June 3. Over the past few months the American public was inundated with dire predictions of economic collapse barring Washington bureaucrats coming to their senses and simply agreeing to write the check. After all, we were told by somber, smart sounding people that Uncle Sam owes the money, ergo raising the debt limit should just be a formality, if needed at all. So, DC lawmakers can take a victory lap, and the rest of us can breathe a big sigh of relief; an unprecedented crisis has been averted. Or has it?
Between 1966 and 2020 national public debt—the cumulative total of annual deficits + interest—increased by ~8% annually, during which time the US experienced four wars, eight recessions, three epidemics and countless geopolitical crises. However, between 2020-2022 the national debt increased 14.41% per year.
According to the Congressional Budget Office, here are the numbers over the next decade:
- Federal revenues rise 48% whereas federal spending increases 57%
- Between 2022 and 2033 net interest (as a percent of federal revenues) increases 109%
- The national debt held by the public surges 81%
- In 2033 annual net interest on public debt will exceed $1.4T
Congressional Budget Office
Spoiler alert; these numbers are wrong. While the CBO has done a good job of forecasting GDP, they have consistently and substantially underestimated federal spending and national debt, and by no small margin. To that point, the 2013 forecast overestimated revenues for the coming decade by $3.1T or 8%, underestimated expenses by $2.4T or 4%, and underestimated the national debt by a mere $6.3T or 29%. Oops! If the CBO’s analysts were Vegas oddsmakers they’d likely have been swimming with the fishes a long time ago.
Why is the nation’s accounting department so bad at its job? With rare exception forecasts are done in a vacuum, assuming a fairly constant baseline growth to revenues and spending. But that’s not reality. In the real world there are economic cycles, geopolitical events, fiscal policy shifts, and the occasional trillion-dollar spending bill.
The elephant in the room is mandatory spending. Specifically, entitlements. Nearly two thirds of federal spending is mandatory, ten percent is interest, with just over a quarter being discretionary, the lion’s share of which is earmarked for military spending.
As mentioned in last month’s commentary, Fracture Mechanics, over the coming decade Americans will have to find money to address an exhausted Social Security Trust Fund, a depleted Medicare Trust Fund, and massive public pension shortfalls. While there appears to be no common ground between Democrats and Republicans these days, there is one exception; none of them are willing to address entitlement form. At least those currently in office and seeking to get reelected.
Nearly twenty years ago Rhonda Byrne wrote a self-help book entitled, “The Secret,” which became a best seller. Her essay is based on the Law of Attraction; using your thoughts to attract and obtain the things you want. All one must do is simply focus on and desire something then, voila, it will happen. Judging from the behavior of Washington lawmakers during the debt ceiling debate, at least half must have read Byrne’s book and are confident that the Law of Attraction will enable them to continue to spend even more in the future without consequence. I hate to be the bearer of bad news but they can’t. Reality always wins.
The government has no coffers, no savings, no rainy-day funds; only debt. The only means Uncle Sam has for obtaining money is to take it from you explicitly via taxes, or indirectly by printing money (exactly what the Fed did between 2020–2022), which leads to inflation—and inflation is simply an implicit tax. And since all future debt issuance must be repaid with principal and interest, borrowing simply defers and increases the cost.
In summary, yes, a temporary disruption (not a crisis) was averted, but all we’ve done is delay the inevitable. The piper must be paid, be it today or tomorrow. A good start would be PAYGO legislation limiting government expenditures to revenues collected. Or, we can simply put our faith in the Law of Attraction and wish the debt away.
Mark Lazar, MBA
Certified Financial Planner™
Pathway to Prosperity
Law of Attraction
June 2023
“Increasing America’s debt weakens us domestically and internationally. Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.” Barack Obama
Item
Dow Jones Ind Avg
8.86%
EAFE Foreign Index
.22%
Barclays Agg Bond Index
2.20%
3.7%
*Market index data as of 5/31/2023
It’s official; the debt ceiling deal passed both Houses and was signed by President Biden on June 3. Over the past few months the American public was inundated with dire predictions of economic collapse barring Washington bureaucrats coming to their senses and simply agreeing to write the check. After all, we were told by somber, smart sounding people that Uncle Sam owes the money, ergo raising the debt limit should just be a formality, if needed at all. So, DC lawmakers can take a victory lap, and the rest of us can breathe a big sigh of relief; an unprecedented crisis has been averted. Or has it?
Between 1966 and 2020 national public debt—the cumulative total of annual deficits + interest—increased by ~8% annually, during which time the US experienced four wars, eight recessions, three epidemics and countless geopolitical crises. However, between 2020-2022 the national debt increased 14.41% per year.
According to the Congressional Budget Office, here are the numbers over the next decade:
Congressional Budget Office
Spoiler alert; these numbers are wrong. While the CBO has done a good job of forecasting GDP, they have consistently and substantially underestimated federal spending and national debt, and by no small margin. To that point, the 2013 forecast overestimated revenues for the coming decade by $3.1T or 8%, underestimated expenses by $2.4T or 4%, and underestimated the national debt by a mere $6.3T or 29%. Oops! If the CBO’s analysts were Vegas oddsmakers they’d likely have been swimming with the fishes a long time ago.
Why is the nation’s accounting department so bad at its job? With rare exception forecasts are done in a vacuum, assuming a fairly constant baseline growth to revenues and spending. But that’s not reality. In the real world there are economic cycles, geopolitical events, fiscal policy shifts, and the occasional trillion-dollar spending bill.
The elephant in the room is mandatory spending. Specifically, entitlements. Nearly two thirds of federal spending is mandatory, ten percent is interest, with just over a quarter being discretionary, the lion’s share of which is earmarked for military spending.
As mentioned in last month’s commentary, Fracture Mechanics, over the coming decade Americans will have to find money to address an exhausted Social Security Trust Fund, a depleted Medicare Trust Fund, and massive public pension shortfalls. While there appears to be no common ground between Democrats and Republicans these days, there is one exception; none of them are willing to address entitlement form. At least those currently in office and seeking to get reelected.
Nearly twenty years ago Rhonda Byrne wrote a self-help book entitled, “The Secret,” which became a best seller. Her essay is based on the Law of Attraction; using your thoughts to attract and obtain the things you want. All one must do is simply focus on and desire something then, voila, it will happen. Judging from the behavior of Washington lawmakers during the debt ceiling debate, at least half must have read Byrne’s book and are confident that the Law of Attraction will enable them to continue to spend even more in the future without consequence. I hate to be the bearer of bad news but they can’t. Reality always wins.
The government has no coffers, no savings, no rainy-day funds; only debt. The only means Uncle Sam has for obtaining money is to take it from you explicitly via taxes, or indirectly by printing money (exactly what the Fed did between 2020–2022), which leads to inflation—and inflation is simply an implicit tax. And since all future debt issuance must be repaid with principal and interest, borrowing simply defers and increases the cost.
In summary, yes, a temporary disruption (not a crisis) was averted, but all we’ve done is delay the inevitable. The piper must be paid, be it today or tomorrow. A good start would be PAYGO legislation limiting government expenditures to revenues collected. Or, we can simply put our faith in the Law of Attraction and wish the debt away.
Mark Lazar, MBA
Certified Financial Planner™
Pathway to Prosperity