FORECASTS & TRENDS E-LETTER
by Henry Rohlfs
October 29, 2024

Three Frightening Stories for Halloween

IN THIS ISSUE:

Count Debt-ula
The Tell-Tale Deficit
The Legend of Sleepy Congress
A Final Thought

Our national debt has soared to a record $35.7 trillion. It isn’t rocket science to understand how this happens. National debt continues to rise because the government spends more money than it received in revenues. It then borrows from lenders to bridge the budget gap.

In the Halloween spirit and with that enormous debt number in mind, I thought about rewriting a few scary classics to keep with the times.

Count Debt-ula

Count Debt-ula, an ancient and immortal vampire-like creature who feeds not on blood, but on national debt. His power grows stronger with each deficit, each reckless spending bill and each failed budget-balancing proposal. The more the country borrows, the more unstoppable Count Debt-ula becomes.

The US national debt now sits at over $35.7 trillion. No nation in the world has ever accumulated this much debt, even going back and adjusting for inflation over time. At $35.7 trillion, this is over 122% of Gross Domestic Product, the highest it has ever been.

Of the total national debt, nearly $28 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.

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 $105,978 per citizen, young or old. Of course, that won’t happen.

The Tell-Tale Deficit

The U.S. President pushes an agenda with wildly increasing deficit spending. Unlike the main character in Edgar Allan Poe’s classic, the President never feels guilty.

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.

This year’s presidential candidates have made many proposals but without much in the way of specifics. For example, Harris wants to expand paid parental leave but has not specified by how much or for how long. Trump has said he wants to make housing more affordable, but without saying how he would do so.

Earlier this month, the Committee for a Responsible Federal Budget reviewed the economic proposals of former President Donald Trump and Vice President Kamala Harris. They found that both would lead to substantial increases in the national debt.

However, neither major candidate running in the 2024 presidential election has put forward a plan to address this rising debt burden. In fact, both Harris and Trump would likely further increase the national debt by as much as $8 trillion over the next four years.

The Legend of Sleepy Congress

Sleepy Congress is a dark place where bills vanish, debates spiral into endless loops and time seems to stand still. It is haunted by the spirit of partisanship and the Headless Lobbyist who lost his head in the throes of Washington politics. Those specters now terrorize anyone who dares to push for meaningful reform.

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.

In the past, 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 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. We have emerged from the pandemic, so now it is critical for America’s leaders to address our rising debt.

If Congress pays for future spending, prioritizes economic growth, raises revenue in the 2025 tax fight, fixes Social Security, and keeps per-capita health spending constant it will be on track to stabilize the debt.

It’s not easy. But it’s not impossible either. Bill Clinton and Congress were able to accomplish something similar in the 1990s, and now is the time to try again.

A Final Thought

How long can this debt explosion continue? 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 U.S. federal debt.

I’d like to end with an excerpt from one of Gary Halbert’s newsletters on the national 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.

Now that would be a truly scary Halloween story. Let’s make sure it never gets written.

Happy Halloween,

 

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