CAMS Weekly View from the Corner - Week ending 10/25/24
October 28, 2024
The Federal government’s fiscal year 2024 ended as of the end of September and in fitting with what has become customary they did not disappoint on posting results that far exceeded their means.
Unfortunately the government living beyond their means does not impact government it impacts the citizenry downstream.
It is far more accurate to replace the title “Federal Debt” with something akin to, “The Collective Citizen’s Debt.” It is the citizenry who incurs the downside of stacking up debt as a means of paying for you name it D.C. officialdom policies.
Government’s living well beyond their means, as standard operating procedures, has proven throughout history to impact the citizenry via devalued currencies, higher interest rates, and price inflation – sound familiar?
Ultimately, this then leads to less and less of the government tax receipt streams available for discretionary allocation.
We use “discretionary allocation” admittedly a bit loosely as most know the government’s budget is filled with line items that are considered to be non-negotiable in terms of altering their allocations. Regardless of sentiment toward them budget line items still remain as a collective societal choice.
What is not a choice - focusing on the massive accumulated debt and the logical conclusion of where it walks us to - is the servicing of that debt generally and meeting required interest payments in particular.
Defaulting on interest payments offers an additional layer of complexity when striving to find additional buyers for said debt.
Being in a defaulted position on accumulated debt always results in a wealth of negatives to include having to pay a higher interest rate to potential buyers as a credibility cliff-dive occurs via the missed interest payments.
With this, interest expense is a must honor line item – no “discretionary allocation” view is even worthy of speculation let alone a collective societal discussion when it comes to that line item within the budget.
Sadly, Interest Expense is devouring evermore of Federal Tax Receipts – this equals less societal discretion for the allocation of funds via the national budget.
Federal Government’s Fiscal Year
It has been awhile since we offered an edition speaking to the D.C. debt issue, i.e. “The Citizen’s Debt” just to stay pragmatic on proper labeling. We thought it timely being the Federal government’s fiscal year just ended.
The Federal fiscal year runs from October 1st through September 30th of each year. Now that we are into October we are currently operating on Fiscal year 2025 for the Federal government.
Let’s take a step back and look at the overall storyline and what has developed in this 21st century.
We have spent some time in the Treasury department’s data trove and put together the above chart of Federal Debt (Citizen’s debt) beginning in fiscal year 2000 - which began October 1st, 1999.
Our red arrows along with yellow insert text boxes narrate the scenes along the path. The bottom line is this debt pile has doubled every nine years. As bad as that sounds the numbers are worse.
We are talking trillion’s here which is an unfathomable number for most to even place into an experiential context. With this, we all here “trillion’s spent” and it just doesn’t compute – similar to seeing a unicorn – “What is that!?” - The brain simply cannot register it and place it into context.
Following our red arrows; in nine years $5 trillion becomes $10 trillion. Then in the next nine years $10 trillion becomes $20 trillion. Then in the next seven years $20 trillion becomes $35 trillion – a 75% increase.
Not to disappoint, projections offer $40 trillion in debt will be “achieved” by 2026 which will offer yet another doubling of debt - $20 trillion becomes $40 trillion in nine years. This debt ride is literally a runaway train.
Economic Context
Let’s do a quick thought scenario.
Using the above chart let’s say our current debt stood at $40 trillion and yet at the same time, along the displayed timeline in the chart, our economy grew to say $120 trillion. (Current annual nominal GDP is $29 trillion for perspective.)
On a personal note my response would be something like “You go D.C. officialdom!!” Such a storyline would depict an extremely productive deployment of debt which manifested into continuous downstream productive economic growth! Fantastic!
While debt grew to a seemingly (in our thought scenario) monstrosity $40 trillion level, follow-on economic growth consistently exploded higher and higher and in so doing dwarfed the amount of debt taken on to achieve said economic growth.
In this scenario the size of our economy as measured in economic growth would be three times the level of debt! Awesome!
Okay, that is context offered with our thought scenario. Sadly, that is not even close to our reality and in fact the opposite is true as displayed below.
The above walks us back to 1980 for an even broader perspective than our initial chart. Depicted is the Federal Debt (i.e. Citizen’s Debt – sad but true) as a percentage of our economy, i.e. GDP.
Unlike in our above thought scenario the above reality presents a terrible multi-decade storyline.
Whereas at the beginning of our chart (1980) said debt level was but a relative fraction of the economy coming in at a mere 30% of GDP - we now stand at 4X that amount coming in at 120% of GDP. Yes, the debt is larger than the size of the economy.
In our thought scenario we presented a case where the economy grew far faster than the growth of Federal debt depicting a scenario where the debt incurred offered tremendous downstream economic benefits via productive growth.
The reality in the chart above offers the opposite - debt has grown continually faster than economic growth.
This informs us we have seen no downstream benefit to society nor have we left near-generations in a position where they would experience a tremendous stream of self-fulfilling productive growth as a result of the debt incurred in recent decades. Rather, we are leaving them with an albatross around their proverbial necks.
If debt levels are growing faster than economic growth over a long period of time it is a sure sign deployment of public funds (think tax revenues coupled with debt incurred) are not being utilized wisely.
The Logical Follow-on
The above is our last chart for this edition. It dates back to 1980 which matches in time our 2nd chart. In the beginning of 1980 the interest on this Federal debt equaled $102 billion (not trillion) on an annual basis. Importantly, that was with interest rates solidly in double digit territory!
As the debt has been on a runaway trajectory it has outgrown economic growth as offered. In addition, the interest on this debt is now running at a $1.1 trillion annual rate. This is 11X the interest expense of 1980 while interest rates paid by the Treasury department, current day, are only a quarter of what they were back then.
We have asked ad nauseam over the previous near-two years: Why are we talking about interest rate cuts and now actually cutting interest rates against our remaining price inflation backdrop?
Answer: The Fed and Treasury are desperately trying to handle the above reality which is now runaway interest expense. If they can reduce the interest rate they can reduce the interest expense. (This is not a long-term solution.)
Will Treasury bond market participants play ball? Thus far they are not as they are pushing up Treasury bond yields out of fear of further price inflation issues.
This is their way of saying: “We need you to pay us a higher interest rate because we do not trust that you have price inflation tamed.”
Dear citizen, it really is debt in our names as we experience the downstream negatives of it be it in the form of price inflation, higher interest rates, less sovereignty in our allocation of public funds and a devalued national currency.
The bottom line - runaway debt ultimately feeds into runaway interest expense – is anyone surprised?
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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