VTI - U.S. Debt: Out Of Control

2023-08-14 11:30:20 ET

Summary

• Fitch's report, downgrading America's credit rating, highlights the lack of control over U.S. budgetary affairs in the past 20 years.
• But, the U.S. budgetary performance has been deteriorating over the past sixty years, getting worse just about every 20 years.
• This performance is not unlike countries, businesses, and families that, over time, come to rely more and more on debt to manage their operations.
• Analysts are calling the Fitch report a warning shot.
• But, the current administration, not unlike other budget-makers, seems to believe that they can continue using more and more debt to finance their future.

The report by Fitch that accompanied the downgrade of America's credit rating referred to the lack of control over the U.S. budgetary affairs over the past twenty years.

What does the U.S. budgetary performance look like over the past twenty years?

Well, take a look!

Not a very pretty picture!

The previous twenty years. Take a look.

And, the twenty years before that.

To put these all into perspective, here is the chart for the full sixty years.

Note that in the first three charts, there is a substantial difference in scale, as can be seen by looking at the numbers on the left-hand side of the charts.

Trying to put things into perspective, the period from 1961 to 1981 is a very mild period when you look at the last chart.

When you look at the individual chart for this period, you see much greater swings in the budget situation.

Budget-wise, the 1960s was a time of great turmoil.

There was the initial effort by the Kennedy administration to pass budgets with deficits to get the American economy "growing again." The Kennedy administration promoted a program based upon Keynesian thinking that had a foundation of budgetary deficits to spur the economy on.

These budgets were not passed while Kennedy was alive. But Lyndon Johnson carried on the effort and succeeded in getting the stimulus package passed.

The deficits created were...teeny...compared with today's numbers. I remember all the battles, however, that took place and the view of how enormous these deficits were.

Then, on top of that, President Johnson slipped in the financing for the Vietnam War, which just pushed the deficits to "huge" levels...for the times.

Then President Nixon supported the deficit spending. To support his deficit budgets, he argued, "We are all Keynesians now!"

And, as you can see, the budgets grew throughout the decade of the '70s and maxed out in 1981.

Well, in 1979 through 1981, Paul Volcker, as chairman of the Board of Governors of the Federal Reserve System, got inflation under control. Although the federal government lived with deficits for the 1980s under Presidents Reagan and Bush, by today's standards the deficits were very controllable.

And, the Clinton administration even brought the budget into surplus territory entering into the twenty-first century.

If you look at the first forty years of the last chart, the fiscal swings look very, very modest when compared with the full chart.

But, now we leave behind the Clinton surpluses and move into the next twenty years, the years that the Fitch report focus upon and claims that the U.S. budget was managed very, very badly.

And, these last twenty years really stand out in the chart that covers the last sixty years.

But, the real point of this presentation is to show how the U.S. government budget has really, really gotten out of control.

Starting with the discussions surrounding the "new economic program" presented by the Kennedy administration in the early 1960s that stressed deficit spending as an important way to get the "economy growing again," we see the government's budget discipline weakening and weakening and weakening over time.

Historically, this is what usually happens.

Debt is something that can seem very useful when not much of it is being used, but almost becomes an addiction as people use it more and more.

Debt usage, if not strongly disciplined, can draw people into using more and more and more of it, and the feeling grows that greater deficit spending is a necessary factor to continued high economic performance.

In this way, the use of debt becomes an overwhelming drive in order to "keep things going."

But, then, debt becomes a burden...something that drags a government...a company...a family...down. Once one gets addicted to the use of debt, it almost always becomes a problem...a disaster...or worse.

May I add that looking at the budget behavior over the last twenty years just emphasizes this problem.

As the Fitch people point out, in the last twenty years or so, it appears as if the U.S. budget has run out of control.

And, as debtors usually do at this stage of the cycle...they argue that they are still in control and can manage their way through this difficult time.

But, you look at the projections for the future. If you look at what the Congressional Budget Office is saying about the next ten years... things don't look all that good.

Spencer Jakab, writing in the Wall Street Journal , emphasizes in "The Scary Math Behind the World's Safest Assets," all the unknowns that still can have a major impact on future deficits.

One of these major factors is the level of interest rates.

The CBO:

"says that U.S. debt held by the public will surpass gross domestic product this fiscal year and that interest on the debt will equal about three-quarters of discretionary, nondefense spending. By 2031, it will be as large."

There is a lot of low-interest government debt in the marketplace that will need refinancing at higher and higher interest rates.

Then there is the uncertainty about the fight of the Federal Reserve against inflation. There is the uncertainty over whether any economic slowdown will be a "soft" landing or more severe.

Then there is military spending and the uncertainty about "peace" in the world. How about any need of supporting troubled banks? And, quite a few other uncertainties?

The ultimate point here is that the United States government is a long way down the path of debt over usage. Many in the current administration seem to believe that they still have everything under control and can continue to spend...and spend.

Mr. Jakab is part of a growing number of analysts that are calling the Fitch move a "wake-up" call.

The response from the administration?

"We can still safely continue to kick the can down the road further!"

To respond to this response, one needs to take a look at the fourth chart above.

The deficit budget swings are getting larger and larger.

Just how much further can they go?

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