On January 19, the country officially hit its fiscal head on the $31.4 trillion debt ceiling. Since that time, the Treasury Department has been using so-called “extraordinary measures” to keep the country running while Congress goes back and forth on the matter of actually raising the debt limit.
To be honest, “extraordinary measures” aren’t all that extraordinary. They amount to using whatever cash is available in the till from tax revenue – as well as some creative bookkeeping – to keep the government functioning while the debt ceiling remains stuck at its present level.
As it turns out, however, this year’s tax collections were lower than expected – which means the government’s capacity to continue relying on extraordinary measures is nearing an end. Treasury Secretary Janet Yellen is warning that “X Date” – the day the government has no choice but to begin defaulting on its debt – could come as soon as June 1.
There is general agreement that the consequences of debt default could themselves be “extraordinary.” Last weekend, Yellen said that “financial and economic chaos would ensue” if the debt ceiling isn’t raised – and it’s the same dire warning that she and others have been issuing for some time.
As for what that “chaos” actually would look like, Moody’s Analytics has some thoughts. In a recent report on the prospect of default, Moody’s suggested the downturn would comparable to the depths reached during the global financial crisis: a peak-to-trough GDP decline of 4%, more than seven million jobs lost, an unemployment rate surpassing 8% and a collapse in financial markets of such magnitude that $10 trillion in household net worth is wiped away.
Few would disagree that’s an awfully unappealing picture of “life after default.” But what of the ugliness that eventually could come to pass if the debt ceiling is raised without a serious agreement to reduce spending, going forward?
An increase in the debt ceiling without such an agreement would mean the federal government is back to moving “full speed ahead” in accumulating debt, continuing to travel a fiscal path many see as reckless and unsustainable.
One of those observers is storied hedge fund manager Stanley Druckenmiller. Druckenmiller recently suggested he’s more concerned about the implications of the nation’s long-term fiscal outlook than he is about the kind of trouble that could arise in the near term over the unresolved debt ceiling.
We’re going to take a closer look at what Stanley Druckenmiller had to say. We’re also going to examine just what the nation’s long-term fiscal outlook is, presently, with an eye to perhaps better understanding just why Druckenmiller is so concerned.
Stanley Druckenmiller is not dismissive of the debt-ceiling standoff and associated possibility the U.S. could default on its obligations for the first time in history. But he does seem to think all of this focus on the current situation is coming at the expense of maintaining a firm grasp on the underlying problem: namely, that the nation’s debt is as high as it is in the first place – and poised to go much, much higher.
In a speech delivered recently at the University of Southern California Marshall School of Business, Druckenmiller opined that “the fiscal recklessness of the last decade has been like watching a horror movie unfold.”
It was in a subsequent email exchange with Bloomberg that Druckenmiller alluded to what he sees as the far-bigger issue when it comes to the nation’s fiscal health.
While acknowledging his hope that the government doesn’t default, the hedge fund legend emphasized, “Honestly, all this focus on the debt ceiling instead of the future fiscal issue is like sitting on the beach at Santa Monica worrying about whether a 30-foot wave will damage the pier when you know there’s a 200-foot tsunami just 10 miles out.”
This isn’t the first time Druckenmiller has sounded the alarm on the nation’s fiscal outlook. Bloomberg notes that when he was touring university campuses 10 years ago, Druckenmiller made it a point to tell his audiences they should pay careful attention to the trend of rising deficits that threaten to destabilize the financial viability of generations to come.
However, says Druckenmiller, conditions today have turned out to be even more disconcerting than he envisioned a decade ago.
In his recent speech, Druckenmiller took both political parties to task for their unwillingness to engage in the heavy lifting necessary on behalf of entitlement programs such as Social Security and Medicare. Throughout the current stalemate over raising the debt ceiling, Republicans have said their call for spending cuts does not include reform of either program, a position some analysts see as wrong-headed.
The potential long-term fiscal impact of entitlement programs left unreformed makes that position look even worse. The current $31 trillion debt burden – as enormous as it is – is misleading because it doesn’t reflect the future obligations of entitlement programs. Account for those, Druckenmiller said, and you’re looking at a total debt burden in the neighborhood of $200 trillion.
So what do government fiscal watchdogs have to say about this – the Congressional Budget Office, for example?
Let’s find out.
The Congressional Budget Office (CBO) is a nonpartisan agency of the federal government, one tasked with the responsibility of providing information about the budget and the economy to Congress. And if you needed any reassurance that it is nonpartisan, you need look only as far as its most recent Budget and Economic Outlook, which provides some rather ominous projections of America’s fiscal future.
Let’s start by seeing what the agency has to say about annual budget deficits.
The CBO projects the federal budget deficit for fiscal year 2023 is $1.4 trillion. That would match the size of the 2022 deficit. Prior to COVID-plagued 2020, there had been only one year in U.S. history when the annual budget deficit had been equal to or greater than $1.4 trillion – that was 2009, when the government pulled out all the stops to help the nation fight back against the impact of the global financial crisis.
But it does seem that 2020 cued a more benevolent view of deficit spending from both sides of the political aisle. If the CBO’s 2023 projection holds, that would mean the annual budget deficit averaged $2.4 trillion per year from 2020 through 2023. As large as that figure is, it is just a little larger – relatively speaking – than the $2 trillion per year the CBO says the deficit will average from 2024 through 2033.
Notable, as well, is the projected size of deficits in relation to gross domestic product (GDP). The 2023 deficit is expected to equal 5.4% of GDP, and then average 6.1% of GDP from 2024 through 2033. How significant is this? Annual deficits have averaged 3.6% of GDP over the past 50 years.
Annual deficits ultimately are reflected in the federal (or “national”) debt, and the impact of the projected step-up in deficits is expected to make the nation’s overall debt burden far weightier.
More specifically, the CBO forecasts that the portion of the federal debt held by the public will rise from 98% of GDP this year to 118% in 2033, due largely to the growth of interest costs and mandatory spending (such as Social Security and Medicare).
But that’s just the beginning. As things stand, the impact of interest and the demands of entitlement spending are anticipated to only grow from here. As just one example, the number of Americans age 65 and older – the vast majority of whom, presumably, will seek to access Social Security and/or Medicare – is forecast to increase by more than 30% in just the next 12 years. The upshot…at least as far as the debt is concerned? The CBO says that by 2053, the portion of the federal debt held by the public will be nearly twice the size of the nation’s economy – a daunting 195% of GDP.
As for gross federal debt, the CBO projects it will rise from the present level of $31.4 trillion to a mammoth $52 trillion by the end of 2033 – an increase of nearly 70% over the next decade.
Now you can see why Druckenmiller is so concerned. As a matter of fact, it turns out that multiple agencies of the federal government – the same federal government racking up all this debt in the first place – are pretty concerned, as well.
I have to be honest: It’s difficult for me to be confident that the current standoff over the debt ceiling is going to end with much, if anything, in the way of meaningful spending cuts.
It may turn out that I’m wrong about that. The highly anticipated meeting earlier this week between President Biden and House Speaker Kevin McCarthy did conclude with neither side budging from their respective position (although future meetings are scheduled).
But here’s the thing: Despite the uncertainty right now over the fate of the debt ceiling, seasoned Republican leaders such as Senate Minority Leader Mitch McConnell are saying flatly the U.S. will not default. To me, such a proclamation “telegraphs” the message that if push eventually comes to shove, Republicans will blink and again agree to raise the debt ceiling without any meaningful spending cuts in hand.
In that case, a default will be avoided. It certainly is good when the U.S. doesn’t default on its obligations. But enabling the continued increase of the federal debt – particularly in light of the longer-term fiscal outlook I summarized in the previous section – could have ominous implications.
And let’s be clear: It’s not just private citizens warning about the nation’s current fiscal path. Agencies of the federal government now are matter-of-factly referring to it as “unsustainable.” Just this week, the Government Accountability Office issued an assessment of the nation’s projected fiscal health that declares, in the very first sentence, “The federal government faces an unsustainable long-term fiscal future.” And last month, the Treasury Department itself published a similar report titled, in part, “An Unsustainable Fiscal Path.”
The message of so many – including Stanley Druckenmiller and even prominent elements of our own government – is clear: Raising the debt ceiling today will allow us to contain what right now is the most urgent potential fiscal crisis…but that continuing to raise the debt ceiling and adding trillions more to the current debt pile could be assuring an eventual fiscal crisis, anyway.
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