FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 29, 2022

IN THIS ISSUE:

1. National Debt Rises, But Budget Deficits Fall – How?

2. National Debt Tops $31.3 Trillion – Does Anyone Care?

3. Why Is Our National Debt So Large? It’s Just Simple Math

4. How Long Can This Explosion In Our National Debt Go On?

Overview – National Debt Rises, But Budget Deficits Fall –  How?

Our national debt has soared to a record $31.3 trillion. Yet our federal budget deficit fell sharply in fiscal year 2022. The national debt continued to rise in FY2022 because the government spent more money than it received in revenues.

The budget deficit for FY2022 fell sharply because federal spending to fight the COVID-19 pandemic declined significantly, but it was still a large deficit. The budget shortfall declined to $1.375 trillion, compared to the 2021 deficit of $2.776 trillion.

President Biden has been trying to take credit for the huge decline in the budget deficit, but in fact his policies prevented the budget deficit from falling even further. I’ll explain it all as we go along today.

National Debt Tops $31.3 Trillion – Does Anyone Care?

The US national debt recently topped $31.3 trillion. No nation in the world has ever accumulated this much debt, even going back and adjusting for inflation over time. At $31.3 trillion, this is over 121% of Gross Domestic Product, the highest it has ever been.

Of the total national debt, nearly $24 trillion is “debt held by the public.” Debt held by the public is all federal debt held by individuals, corporations, state or local governments, foreign governments and other entities, not including the US government.

The other $7.3 trillion is so-called “intragovernmental debt” which is owed by the federal government itself. Almost all US government agencies owe some government debt. This intragovernmental debt has also never been as large as it is today.

Some argue that intragovernmental debt should not count toward the national debt since they say it is “debt we owe to ourselves. I and many others disagree with this argument because intragovernmental debt is an obligation and must be repaid or extended (rolled over) just like debt held by the public. So, it absolutely must be included in our national debt.

As you can also see in the chart above, if we were to somehow repay the national debt today, it would require a contribution of $93,881 per citizen, young or old, or $247,882 per taxpayer. Neither of those is going to happen, of course.

Why Is Our National Debt So Large? Is There A Limit?

America's growing national debt is the result of simple math — each year, there is a mismatch between spending and revenues. When the federal government spends more than it takes in, we have to borrow money to cover that annual deficit. And each year’s deficit adds to our growing national debt.

Historically, our largest budget deficits were caused by increased spending around national emergencies like major wars or the Great Depression.

Today, our deficits are caused mainly by predictable structural factors: our aging baby-boom generation, rising healthcare costs and a tax system that does not bring in enough money to pay for what the government has promised its citizens.

The coronavirus crisis accelerated an already unsustainable debt trajectory, both because of its devastating effect on the economy and the necessary legislative response. Once we have fully emerged from the pandemic, it will be critical for America’s leaders to address our rising debt, and its structural factors, which are described below.

The question is, will our leaders really do it? I am not optimistic. Politicians on both sides of the aisle seem to believe there is no limit to how much they can spend, and as I have written often over the years, the federal budget goes up every single year. The last time we had a balanced budget was when Bill Clinton was in the White House.

As noted above, one of the biggest reasons our debt is growing faster than ever today is our aging population. America is undergoing significant demographic change. Our society is aging as the large Baby-Boom generation retires – 10,000 will turn 65 every day through 2029.

Moreover, people are expected to live longer, on average. That is great news, but it means we must prepare for the financial needs of longer retirement.

These huge demographic trends put increasing pressure on the federal budget – and in particular on vital programs that serve older and vulnerable Americans like Social Security, Medicare and Medicaid.

Another driver of our national debt is rising healthcare costs. In many ways, healthcare is the most important issue for our nation’s fiscal and economic future. It represents nearly one-fifth of our entire economy, and it’s the second fastest-growing part of the budget.

The US healthcare system is the most expensive in the world, but we don’t really get what we pay for. We spend over twice as much on healthcare as most other advanced nations, but our system does not provide better overall health outcomes. Improving the performance of the US healthcare system will not only improve Americans’ lives, it will also help stabilize our fiscal and economic outlook.

The next larger driver of our national debt is inadequate federal revenues. It would be one thing if our tax code was designed to fund all the promises our government is making. But it’s not. Far from it.

The US tax system does not generate enough revenues to cover the spending policymakers have enacted. This rapidly growing imbalance between revenues and spending leads to higher and higher annual deficits, and the result is an increasing national debt balance.

The three items discussed above are the largest drivers of our national debt today. But that will be changing before too long. Interest on the national debt is rising more rapidly than any other component of our federal debt.

Currently, we pay $965 million in interest on our national debt every day, even with interest rates still at relatively low levels, historically speaking. In 10 years, the interest on our national debt will be nearly triple what it is today.

How Long Can This Explosion In Our National Debt Go On?

This is the question everyone wants the answer to. Unfortunately, no one knows. The closest thing to an answer is that it can only continue as long as lenders continue to be confident in buying US federal debt.

Our debt instruments say they are backed by the “full faith and credit of the United States government.” This seems to be sufficient assurance to lenders that they will get their money back if they need it. So far, the government has had little problem selling its continually rising debt and rolling over existing debt as well.

But what if that confidence was shaken? What if buyers of our debt were to become fearful the US could not make good on some or all of its debt? In that case, the federal government would have to balance its budget in short order.

More importantly, what would happen if the US government actually defaulted on some of its debt? This would create a global financial crisis overnight.

I am NOT predicting this is going to happen anytime soon.

Yet it sure seems to me that there must be some limit on how much US debt bondholders are willing to tolerate. If and when we reach that limit things will get very ugly very fast.

You’d think our leaders would know this and would be having serious discussions about taking steps to get our surging national debt under control. Yet such discussions are not happening as far as I know and, as noted above, the federal budget gets larger every year.

Budget Deficits Coming Down, But Not Because of Biden

Federal budget deficits have fallen significantly since the peak in 2020. Since peaking at above $3 trillion in 2020, the deficit is projected to have dropped to $1.375 trillion in fiscal year 2022, according to the US Office of Management and Budget.

President Biden is trying to take credit for this decline in the budget in his speeches around the country in recent months. I don’t know how the president could substantiate such a case because his policies have done nothing to bring down the deficits.

The president has touted the deficit reduction claim in his speeches, calling it “the largest one-year drop in American history,” and saying, “the deficit has come down both years that I’ve been in office.”

But the fact is, President Biden’s policies have DONE NOTHING to bring down the deficit. In fact, they have made it worse. The deficit would have come down even more if, for example, it wasn’t for the president’s student loan debt forgiveness program. Forgiven loans count as government spending.

The deficit has come down because federal spending to fight the COVID-19 pandemic has fallen significantly, not because of President Biden’s policies. Mr. Biden’s advisors think the public will buy anything the Biden administration says. Sadly, that may be true for many Americans, but I want my clients and readers to have all the facts.

Finally, I hope everyone had a great Thanksgiving holiday. We certainly did at the Halbert House! The kids came home with their spouses and the two grandbabies. We enjoyed plenty of great food, watched lots of football and had a great time together. We certainly have much to be thankful for!

Very best holiday regards,

Gary D. Halbert

SPECIAL ARTICLES

Budget Deficit Decline Due To COVID Ending, Not Biden

Biden Policies Have Nothing To Do With Deficit Reduction

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