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America’s National Debt Tops $13 Trillion |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. $13 Trillion & Soaring Higher 2. IMF Warns US to Slash Its Deficits 3. IMF Urges US to Cut Deficits by 12% of GDP 4. BIS Issues a Chilling Debt Warning to US 5. President Obama’s “Debt Commission” $13 Trillion & Soaring Higher With little fanfare from the media, the US national debt topped a record $13 trillion last week. That compares to our latest total Gross Domestic Product – the sum of all goods and services produced in the US annually – which was $14.6 trillion as of the end of the 1Q. Thus, our national debt is now equal to almost 90% of GDP and is rising at a record rate. To put $13 trillion in perspective, it would buy over 16 billion top-of-the-line Apple iPads (around $800 a pop), over 34 million Rolls Royce Phantoms, or 83 Googles based on its current market cap. $13 trillion represents over $42,000 owed by every man, woman and child among the more than 300 million Americans alive today, according to USDebtClock.org.
The federal budget deficit for fiscal 2010 (ending September 30) is projected to reach a record $1.5 trillion, and the Congressional Budget Office (CBO) forecasts a deficit of $1.3 trillion for fiscal 2011. Unfortunately, these projections may be too optimistic as I have written often before. Either way, our national debt could exceed annual GDP in just a few years at this rate. Two weeks ago, in my May 25 E-Letter, I wrote about the $1 trillion bailout fund being planned to rescue Greece and any other European nations that may get into trouble, the so-called “Club Med” countries. Near the end of that letter, I also mentioned the so-called “Cornyn Amendment” (SA 3986) that was recently passed as part of the massive financial regulatory reform bill. The Cornyn Amendment basically says that the US cannot lend bailout money, directly or indirectly, to countries whose outstanding debts exceed their GDP – unless there is some certifiable way to guarantee they will pay us back. Ironically, America is on track to be in that very position in only a few more years. Each year in early February, American presidents submit their proposed federal budgets for the following fiscal year, along with budget forecasts for the following 10 years. Shortly thereafter each year, the non-partisan Congressional Budget Office releases its own revised projections, including the estimates of the annual budget deficits over the next 10 years. On February 1 of this year, President Obama submitted the largest federal budget in history, over $3.8 trillion for fiscal 2011, and as noted above, the CBO forecasts that the budget deficit for next year will be a whopping $1.34 trillion. Using the CBO’s latest projections, the national debt will explode by almost $10 trillion by 2020, based on Obama’s budget projections. That would put our national debt at an unbelievable $20+ trillion. In the spirit of fairness, I should point out that the national debt increased $4.9 trillion during the eight years that President George W. Bush (43) was in office. By comparison, the national debt has increased by almost $2.5 trillion in less than a year-and-a-half with President Obama in office. Here is the CBO’s latest chart depicting the almost $10 trillion that will be added to our national debt over the next 10 years based on Obama’s budget forecasts.
To be clear, the darker bars in the chart above represent the CBO’s “baseline” deficit projections before Obama released his 10-year budget forecasts back in February. The lighter bars are the deficit projections after Obama’s forecasts were released. Take special notice of the magnitude of the deficit increase every year compared to what the CBO previously projected. If we include the then-record fiscal 2009 budget deficit of $1.4 trillion, our national debt will soar by $9.755 trillion by 2020. Here are the CBO’s latest deficit estimates through 2020, including the actual FY 2009 deficit:
TOTAL $9.755 Trillion Worst of all, the projections illustrated above may well be too optimistic. Most obvious, the CBO assumes there will not be a recession between 2010 and 2020. Really? They estimate that the economy will grow by an average of 3% in 2010-2011, and then grow by an average of 4.9% a year in 2012-2020. Nearly 5% GDP growth for nine years in a row is a pipe dream. With the global debt crisis still in its ascendancy, I don’t know anyone who believes these rosy CBO projections will be nearly accurate. If they are too optimistic, and I believe they are, we could be adding much more than another $10 trillion to our national debt by 2020. Frankly, I don’t believe the markets will allow this to happen, and I will have more to say on this subject in the weeks ahead. IMF Warns US to Slash Its Deficits On May 14, the International Monetary Fund (IMF) released a huge new study which focused on the out-of-control government deficits around the world. It called on governments worldwide to slash their deficits, including the United States. Overall, the IMF report recommends that global deficit spending be cut, on average, by a whopping 8.7% of global GDP. Put differently, the IMF would have deficits decreased around the world by apprx. $4 trillion a year. Friends, that is huge! And guess who has the largest deficits in the world – the US, of course. The IMF projects that the US national debt will surpass 100% of GDP by 2015 (see graph below). I believe it will happen even sooner.
America’s exploding federal debt is only part of the problem. Another serious problem is the fact that US outstanding debt has the shortest average maturity among major industrialized countries. As noted in the table below, the average maturity on US government debt is down to only 4.4 years. The Treasury has increasingly opted to sell shorter-term securities which can be sold at much lower interest rates than long-term bonds. While this practice may have saved the government some money, most analysts agree that short-term rates will be the first to rise when it is clear that the economic recovery gets fully back on track. While most of my sources continue to predict that the Fed will not raise short-term rates this year, we all know that it will happen at some point. And because the government has chosen to increasingly issue shorter-term debt, it will very likely have to rollover that debt at higher rates in the future. (See the far right-hand column in the chart below.)
Note in the chart above that even bankrupt Greece has a longer maturity rate on its debt than does the US. And Greece illustrates another danger the US faces. Regardless of the direction in interest rates, there is always the risk that investor demand can fall off a cliff. While US Treasuries are considered to be among the safest investments in the world, this may not always be the case, especially with us on track to add $10 trillion or more to our national debt over the next decade. IMF Urges US to Cut Deficits by 12% of GDP The latest IMF report includes a chilling recipe for advanced and emerging nations to significantly lower their debt levels between now and 2020. They analyzed each country’s debt level and made estimates of how much each country would have to cut to reduce their debt levels to no more than 60% of GDP. Remember, the US national debt of $13 trillion is currently at apprx. 90% of GDP, and the US has more outstanding debt than any other country.
12% of our current GDP ($14.6 trillion) comes to $1.75 trillion in today’s dollars. So, does anyone believe we are going to cut our debt by the equivalent of 12% of GDP by 2020? Not hardly! Instead, we are on track to add $10 trillion by 2020 when our debt will be well over 100% of GDP, unless the US economy soars over the next decade. BIS Issues a Chilling Debt Warning to US The Bank for International Settlements (BIS) is an international organization of world central banks which exists to promote international monetary and financial cooperation and serves as a bank for central banks and to international organizations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreements of 1930. Earlier this year, the BIS released a similar – but even scarier – study than the IMF report noted above. The BIS used global debt projections that are similar to the IMF’s numbers. But the BIS report factored in effects of the aging populations of most developed countries. Basically, the BIS tried to estimate the unfunded, “age-related” expenditures for each country covered in the report. Doing so, the debt numbers explode on the upside. The BIS chart below shows the current debt projections – with age-related spending included – (as a percent of GDP) for the US, the UK, Japan and Germany. The top line in each chart (red) shows where we are headed if we continue on the present course. Notice that the US debt-to-GDP ratio explodes to over 400% of GDP over the next 30 years! The second line (green) projects what would happen if we cut government spending by 1% of GDP for five years. Even under that scenario, the US debt-to-GDP ratio soars to over 300% over the next 30 years.
The third line (blue) projects what would happen if we cut government spending by 1% of GDP for five years AND freeze age-related spending. Even under that scenario, the US debt-to-GDP ratio soars to over 200% over the next 30 years. Only Germany sees its debt go down in this scenario. [Note that in the Japan chart, the green and blue lines are superimposed.] With few exceptions (such as Germany), the austerity measures suggested in the chart above still don’t address the explosion in debt that is projected over the next 30 years. As a result, the BIS concludes that most indebted countries will have to raise the retirement age and quite possibly cut retirement benefits to avoid a potentially fatal financial crisis. Here is the link to the full BIS report: http://www.bis.org/publ/work300.pdf President Obama’s “Debt Commission”
On February 18, President Obama signed an Executive Order creating a debt commission, officially entitled the “National Commission on Fiscal Responsibility and Reform,” tasked with making recommendations on how to “cover the cost of all federal programs by 2015.” In January, the Senate voted down a similar commission, with liberals against any move that might force spending cuts and conservatives against what they perceived as a way to give the White House cover for tax hikes. This mission statement seemed to ring hollow given the fact that President Obama had just recommended adding almost $10 trillion to the national debt by 2020 with the release of his federal budget for FY2011 and projections for the next 10 years. So, on the one hand, he would almost double the national debt by 2020, and on the other, he would have his Debt Commission slash the budget deficit to zero by 2015. Former Senator Alan Simpson (R-WY) and former Clinton Chief of Staff Erskine Bowles were tapped to head the 18-member Debt Commission, which held its first meeting on April 27. Given that we have trillion-dollar deficits projected for the next several years, it seems all but impossible to achieve the Commission’s goal of balancing the budget by 2015. President Obama stated that “everything has to be on the table” including spending cuts, tax increases and even a “Value-Added Tax” (VAT).
Conclusions Since the serious recession in 1981-82, the US economy has consistently surprised on the upside, and the four recessions between 1984 and 1998 were brief and mild. However, the recession of 2000-02, at the time, was the most severe since the Great Depression. The recession and credit crisis of 2008-09 was even more severe than 2000-02, and we have yet to fully recover from it, despite the government spending trillions of dollars to revive the economy. Americans are coming to realize that out-of-control government spending is the problem, as evidenced by numerous polls. Now, even international bodies – such as the IMF and the BIS – are calling on the US to significantly reduce its deficits. President Obama has responded by creating his Debt Commission, all the while his own budget projections call for adding almost $10 trillion to the national debt by 2020. I do not believe Obama’s Debt Commission will recommend slashing spending by enough to balance the budget (not including interest payments) by 2015. After all, the members of the Debt Commission are among those that got us into this predicament in the first place. This is why I believe they will propose a VAT, and this will be even worse for the already stretched consumers whose spending makes up apprx. 70% of GDP. This inevitably leads to the question: Has our national debt reached the point that the US economy will now surprise on the downside for the next decade or longer? Never one to be a gloom-and-doomer, I believe we may have reached that point. LATE NOTE: The Washington Post reports this morning (Tues, Jun 8) that President Obama ordered federal agencies to “develop plans for trimming at least 5 percent from their budgets by identifying programs that do little to advance their missions or President Obama’s agenda.” The article goes on to say that this latest decision by the Obama administration came as a result of “rising public anxiety over government spending…” Cutting 5% from the fiscal 2011 budget of $3.8 trillion, assuming it even happens, will do little to reduce the projected $1.34 trillion deficit. Doing the math, that would cut next year’s deficit to $1.15 trillion, again assuming it really happens (don’t count on it). Wishing for better news,
Gary D. Halbert
SPECIAL ARTICLES:
Obama is Making a Bad Situation Worse
The bad news is that there is a lot of bad news
The Government’s Peculiar Assault On Profits (excellent article)
George Will on a new tax reform proposal before Congress |
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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent. |
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