It would be nice if for once, we could deliver some good news on the US national debt outlook.
Talking about this topic again almost feels like beating a dead horse, except that the carcass keeps getting bigger and more bloated.
But with the recent passing of President Trump’s tax cuts, the stark reality of our national debt situation has again gotten worse. Let’s examine the facts.
As at February 2, 2018, the total US national debt stands at $20.6 trillion, with the debt-to-GDP ratio exceeding 100%. And despite the promises of the talking heads on TV, both these figures will only keep increasing. Here’s what the US Treasury has to say about its future borrowing estimates.
During the January – March 2018 quarter, Treasury expects to borrow $441 billion in net privately-held marketable debt…..During the April – June 2018 quarter, Treasury expects to borrow $176 billion in net privately-held marketable debt…
This means that by June, we are looking at an increase in debt of $617 billion, a 3% increase in less than half a year. This is significant. If you’re looking for a reference point, debt-to-GDP ratio pre-financial crisis was under 65%. The first quarter $441 billion in expected borrowing is also the largest figure since 2010, when the economy was just starting to recover from the great financial crisis.
The debt is projected to rise so fast that the Congressional Budget Office has predicted that by early March the debt limit will need to be raised. This is despite the ‘extraordinary measures’ deployed by Treasury Secretary Steven Mnuchin last year to avoid breaching the debt limit.
Of course, Mr. Mnuchin has strongly denied that the $1.5 trillion in tax cuts would worsen the problem, ignoring that the cuts are projected to add more than $1 trillion to the deficit over a decade. And this figure is including economic growth, by the way.
In November 2017, Fitch Ratings raised its medium term debt forecast for the American economy. It noted that with the tax cuts, the debt-to-GDP ratio could rise to 120% by 2027. Judging by how the situation is progressing, we won’t have to wait that long.
A Vulnerable Economy
The American economy is becoming an increasingly vulnerable economy. Sure, the American economy isn’t doing too badly at the moment in terms of growth. But the Fed is moving along with its QE unwind plan at a nice clip, ahead of expectations in fact, reducing its Mortgage Backed Securities by $18 billion in January, ahead of the expected $12 billion.
The great QE unwinding will take liquidity out of the markets and have an adverse impact on the prices of stocks and bonds. It seems that the bond market is already reacting, with US Treasury 10-year yields increasing to 2.79%, the highest since April 2014. Remember, when yields are rising, bond prices are falling, so what we are seeing here could be the start of a selloff. Further, rising yields also means that the market is expecting rising inflation, meaning that inflation expectations are also the highest in years.
Finally, rising interest rates could also impact long term mortgage rates, raising the specter of yet another housing bubble and subsequent collapse. Let’s put all the pieces together. We have rising debt, rising inflation, a Treasury selloff, plus the potential of yet another housing bubble.
Sure the stock market continues to perform and economic growth is doing pretty well. But these are just the positive indicators that politicians love to highlight and use to cover the negatives. There is zero political will on either side of the political aisle to reduce government spending. If we continue to spend as if the growth is guaranteed, what happens when the unexpected hits again?
Intelligent investors see the signs. That’s why they are diversifying their portfolios into hard assets such as gold; assets that have withstood the test of time as long term stores of value, assets that can hedge against the entire economy. In today’s tough times, it might be wise for you to do the same.
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