FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 8, 2022

IN THIS ISSUE:

1. U.S. Debt Hits Nearly $31 Trillion – With No End In Sight

2. Who Does The US Government Owe All This Money To?

3. IRS Approves Largest Individual Tax Deduction In 35 Years

Overview – U.S. Debt Hits Nearly $31 Trillion – No End In Sight

No nation in the history of the world has ever accumulated as much debt as the United States government owes today. Nothing even close, as a matter of fact. And in the last several years we’ve added to our national debt at the most blistering pace of any country on the planet.

As of the end of September, our national debt stood at a staggering $30.929 trillion according to the Treasury Department. US individual taxpayers’ share of the national debt is now estimated at $93,665 per person. Most Americans pay no attention to the size of our national debt or how fast it is accelerating. Most assume there is no limit to how much money the Treasury can issue.

Like a lot of issues, the public is right on this one… until it’s not. I have given up on trying to predict when this house of cards comes falling down. I have been warning about it since the national debt first crossed $5 trillion in the late 1990s. Probably even earlier than that. I’ve been wrong for so long I’ve given up trying to predict when this unprecedented debt juggernaut blows up. But if history is any indicator, it will at some point. But no one knows when.

As you can see in the chart above, the rate of accumulation of debt has accelerated rapidly since 2000. Here, too, there seems to be a consensus that there is no limit to how fast the government prints and spends money it does not have.

When Joe Biden was sworn in as President of the United States on January 20, 2021, the US national debt stood at $27.76 trillion. Just over eight months later, at the end of the US government's 2021 fiscal year, the US government's total public debt outstanding had risen to $28.43 trillion – in less than a year.

And now, just one year after that, the US national debt has risen to $30.93 trillion through the end of the US government's 2022 fiscal year. That's an increase of $2.5 trillion over the past year and an increase of $3.17 trillion during President Biden's tenure in office.

Who Does The US Government Owe All This Money To?

The following chart illustrates who the US government's biggest creditors are as of the end of the US government's 2022 fiscal year on September 30, along with the portion of the national debt they are owed.

With the Fed having raised interest rates above the near-zero level they were at when President Biden was sworn into office, US individuals and institutions (banks, insurance companies, pension funds, etc.) have picked up most of the slack now that loaning money to Uncle Sam has become more worthwhile with higher interest rates. The share owned by this category of major national debt holders has increased from 37.7% to 42.1%.

Foreign entities collectively hold 24.3% of the total debt liabilities issued by the US government, down from the share of 26.6% they held at the end of the US government's 2021 fiscal year.

Of the portion of the national debt owed to foreign-based institutions and countries, Japan continues to hold the greatest share at 3.9%, down from its 2021 share of 4.6%. China comes in second holding a share of 3.8%, falling from a share of 4.6% in 2021. Both countries have been reducing their holdings of US government-issued debt securities to keep their currencies from losing too much value with respect to the US dollar.

The international banking centers of Belgium, Ireland, and Luxembourg saw their share of the US government's total public debt outstanding dip from 3.0% to 2.8%, while the United Kingdom saw its share rise slightly from 2.0% to 2.1%. Brazil and the remaining foreign nations saw their shares of the US national debt dip year over year.

The US Federal Reserve is Uncle Sam's second largest creditor, accounting for 18.3% of the entire US government's national debt. The Fed's share of the total public debt outstanding has decreased from 19.1% a year ago, mainly as the Federal Reserve has all but stopped underwriting the US government's new spending.

Instead, since March 2022, the Federal Reserve has been hiking interest rates in a campaign to slow the rise of inflation that was unleashed by President Biden, presidents before him and Congress.

Meanwhile, the share of the US government's national debt owed to Social Security has continued falling from 9.2% to 8.9%. That's because Social Security has been running in the red since 2009, forcing its Old Age and Survivors' Insurance Trust Fund to sell off US treasuries it accumulated when it was operating in the black, so it can keep paying out benefits at promised levels.

Social Security's share of the US national debt is projected to decline to 0% in 2034. After that happens, Social Security benefits will be reduced by somewhere between 20-25% as promised under current law – unless Congress changes it, which it almost certainly will. The retirement trust funds for the US government's military and civilian employees together account for 6.6% of the total US national debt, down from 7.1% in 2021.

At the end of the day, it would appear there is no limit to how much the US government can borrow. There seems to be an unending appetite for Uncle Sam’s bonds. Yet history has consistently shown that countries’ ability to sell their bonds comes to an end at some point.

While it is difficult to envision that day coming for America, it is also dangerous to ignore history. One thing is clear, though: Our debt of nearly $31 trillion is now far too high to ever be repaid, even if our politicians had the will to do it – which they don’t.

The only way this much debt goes away is by default. If that ever happens it will be the greatest financial disaster in history.

IRS Approves Largest Individual Tax Deduction In 35 Years

Due to soaring inflation, the Internal Revenue Service just increased the individual tax deductible for 2023  to the highest rate in more than 35 years.  Inflation adjustments for the 2023 tax year increased after prices for rent, groceries, gas, etc. reached heights not seen in 40 years.

Data released by the Bureau of Labor Statistics in late October showed that compared to last year, rent is up 7.2%, electricity prices are up 15.5%, groceries are up 13% and health insurance is about 30% more expensive.

The announcement of adjustments is an annual occurrence, but in a year of high inflation, the move to raise the standard deduction and income thresholds where tax rates take effect may mean savings for people in all income brackets.

Individual tax deductibles increased by $900 to $13,850, and by $1,800 to $27,700 for married couples filing jointly, a roughly 7% increase compared to tax year 2022, the IRS announced last week. This increase is the largest hike since 1985 when tax brackets were first tied to inflation.

In general, tax brackets also rose by roughly 7%, with the minimum income for the top rate of 37% skyrocketing from $539,900 to $578,125, according to the IRS. The lowest bracket of 10% now applies to individuals earning $11,000 or less, up from $10,275 in tax year 2022.

Inflation, as measured by the Consumer Price Index (CPI), has remained at or above 8% on an annual basis since March 2022, according to data from the Bureau of Labor Statistics. Despite declining in both August and September, year-over-year inflation has declined much slower than analyst expectations, with core inflation, a measure that discounts energy and food prices due to their volatility, actually increasing over the past few months.

Child tax credits were not adjusted, as they were set by the American Rescue Plan, but other incentives, like the Earned Income Tax Credit, which grants tax credits to low-income earners and families, increased by roughly $200 for qualifying taxpayers with three or more children, according to the IRS. Adoption expenses of up to $14,890 can be written off in 2023, up $450 from 2022.

The IRS also announced significant increases in the maximum value of gifts and estates shielded from taxes. The maximum value of shielded estate money increased by more $800,000, from just shy of $12.1 million to slightly more than $12.9 million, with the maximum shielded value of gifts increasing from $16,000 to $17,000.

This is all good news for taxpayers.

Very best regards,

Gary D. Halbert

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