The problem is debt, not the debt ceiling
Stephen Jen & Joana Freire
Extract from our "The Problem is Debt, Not the Debt Ceiling" research paper, published on the 25th of May 2023. Register for a free trial* to access the full paper.
The looming risk of the debt ceiling triggering a default by the US is the urgent matter concerning investors. But, in our view, the important issue is the debt profile itself: the US’ public debt is on a clearly unsustainable trajectory.
- According to the projections of the CBO (Congressional Budget Office), the US’ public debt could breach 200 percent of GDP in the late 2050s. These dire projections are not new. Yet, there have been minimal discussions in the financial markets, among academic experts, and the policy makers of this impending fiscal crisis, as if this outcome were already accepted as a matter of course.
- Around three-quarters of total US federal non-interest expenditures was on entitlement (or mandatory) spending in 2022, leaving only 27 percent for discretionary spending, such as on education, transportation, and the environment. Three decades ago, in the early 1990s, the split was closer to 50:50 between entitlement and discretionary spending, and the US’ entitlement spending share is high compared to some of the more ‘socialist’ developed economies. The share of the budget spent on interest payments has also surged from a multi-decade low of 5 percent in 2021, and it could consume 15 percent of the US budget by 2033 and 24 percent by 2053.
- The trend of increasing public debt is common but not quite global. In fact, according to the IMF, the debt-to-GDP ratios of the US will catch up to and surpass that of Italy by 2027, a mere four years from now.
- Unlike Japan, the US is a savings deficit country, and has been one since the early-1980s. An explosive surge in the debt-to-GDP ratio since the GFC is alarming to us, and should be to other investors, too, in our view. What is even more alarming is the lack of concern on the part of the US policy makers, as if they do not acknowledge that there is a link between the debt profile and monetary policy, the productivity of the US, moral hazard problems in the US, de-dollarisation, and the dollar’s value itself. This omerta is worrying.
The full report contains the following sections:
- The debt ceiling debate
- The unsustainable US debt profile
- Unrestrained growth in entitlement spending
- The danger of high and rising interest payments
- Problems with this nonchalant attitude toward runaway debt
- Bottom line
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