A Reminder That Deficits Are Debts

When the Congressional Budget Office (CBO) laid out its forward looking projections about the US economy over the next decade (2019-2029) it attracted little press.  In studying the report, we take note of this statement, “Debt. Because of persistently large deficits, federal debt held by the public is projected to grow steadily, reaching 93 percent of GDP in 2029 (its highest level since just after World War II) and about 150 percent of GDP in 2049—far higher than it has ever been (see Chapter 1). Moreover, if lawmakers amended current laws to maintain certain policies now in place, even larger increases in debt would ensue.”

The report states that by 2029 the nation will be operating with an annual shortfall of approximately five trillion dollars. Yes, we too had to read it twice to make sure that was the case. In reading the report it is clear that there are many headwinds facing our economy in what seems to be just a few short years. On the negative side entitlements to retired baby boomers will exacerbate the outlay challenges. The reduction in the corporate tax rates as well reduces revenues. On the plus side the expiration of many of the Trump tax deductions will help modestly.

What’s most interesting in reading the details of the accompanying report is that the actual results could be worse. The projections depend on a variety of variables outlined in the report including very low inflation, a ten-year hovering at or below 4%, low unemployment and stable GDP. Any outcome that is worse would cause even a greater shortfall. For example, the forecasted interest expense on the debt is projected to be just over $7 trillion between 2020-2029, but this is entirely dependent on rates. Mortgage Media wonders what happens as the need to issue more debt is translated into bond prices.

After all, look at this chart of who buys the US debt today. Domestically individuals who own treasuries in their investments and the Federal Reserve are significant dependencies. After that, China and Japan lead the global investment community.

All of this is worthy of concern. We view the deficit issue as one of the leading challenges that our economy will face going forward and one that will require some very difficult decisions because, in our view, a forecast of debt being 150% of revenues on an annual basis is simply an impossible concept to fathom.