Should We Worry About Government Deficit?

If our elected leaders are not concerned about the government deficit, should the citizens be worried?

Governments worldwide spend more than their total revenue and borrow to make up the difference.

The U.S. Debt Clock shows the US federal debt to be $21.6 trillion, averaging $177,283 per taxpayer.

The government now pays interest on $21.6 trillion. Below is a graph tracking the 10-year interest rates on US treasuries.

My brokerage website shows 10-year treasuries are currently paying 3.22%.

Since December 2016, interest rates have roughly doubled, from 1.5% to 3%. The 1.5% increase adds $324 billion in interest cost to the deficit annually and will continue to rise.

The New York Times (NYT) reports, “As Debt Rises, the Government Will Soon Spend More on Interest Than on the Military”:

“The federal government could soon pay more in interest…than it spends on the military, Medicaid or children’s programs.

The run-up in borrowing costs is a one-two punch brought on by the need to finance a fast-growing budget deficit, worsened by tax cuts and steadily rising interest rates that will make the debt more expensive.

…. But the tax cuts passed late last year have created a deeper hole, with the deficit increasing faster than expected.”

The NYT publishes select facts to push their political bias.

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I wrote about Nobel Prize-winning economist Paul Krugman’s columns in the NYT. Prior to the election, anticipating a Clinton victory, he wrote, “We should probably be running bigger, not smaller deficits in the medium term.… Yes, we may face some hard choices a couple decades from now…and in any case, there aren’t any choices that must be made now.”

Less than 80 days later, after Clinton lost, he wrote “Deficits Matter Again.”

The media ignores or screams about deficits when it suits their political agenda. We’ve heard this crap for generations.

Do deficits affect us, and what can we do about it?

Nomi Prins tell us, “World’s Most Important Bank Issues Urgent “Zombie Alert”:

It’s been a decade since the world’s major central banks reacted to the financial crisis by cheapening the value of money through record low, zero or negative rates.

…. In its recent…report, the Bureau of International Settlements (BIS) warned that low rates have catalyzed an increase in the number of “zombie” firms…to an all-time high.

Zombie firms are companies “that are at least 10 years old, yet are unable to cover their debt service costs from profits.”….

…. In the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016.”

The International Monetary Fund(IMF) warns:

“The world economy is at risk of another financial meltdown, following the failure of governments and regulators to push through all the reforms needed to protect the system from reckless behaviour, (Emphasis mine)….

With global debt levels well above those at the time of the last crash in 2008, the risk remains that unregulated parts of the financial system could trigger a global panic….

…. It warned that “large challenges loom for the global economy to prevent a second Great Depression“.

Is the problem government debt – binge borrowing corporations – or both?

I had the privilege of spending time with Jack Kemp, and Senator Connie Mack discussing “supply-side economics”. The idea was by cutting corporate and individual taxes, corporations would use the extra money to reinvest in production facilities and improvements creating more jobs. Individual tax cuts would spur spending while also creating jobs. Both showed me graphs indicating a lag factor. In 2-3 years, gross domestic product and government income tax revenues rose because of an improved economy.

The early returns on the recent tax cuts show that unemployment is coming down and the economy is starting to pick up.

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt.” – Cicero 55 B.C.

I dislike the political melodrama; let’s be honest. While politicos may use the deficit to sell a tax increase to the citizens, I’ve never seen any politician raise taxes intending to use the money to pay off debt.

Clinton instituted a huge tax increase intending to spend the money for social programs. The Speaker of the House, Newt Gingrich, held the reins. Combined with the internet boom, we had a government surplus for a short time.

Whether it is the Bush tax cuts or the Obama spending programs, the political class has little concern about the ever-growing deficits. Not much has changed since Cicero warned the Romans.

The Undeniable Truth With few exceptions, the political class doesn’t give a damn about the debt. The politicos use the tax system and government spending to buy votes to keep them in power. They kick the can down the road; secretly hoping any negative consequences happen when they are out of power, enabling them to make political hay and convince the public they should rule forever! Their behavior won’t change; they will continue to pile up debt until the citizens revolt!

What about the corporate sector?

Mike “Mish” Shedlock tells us “$300 Billion Cash Repatriated in Q1, GS Expects Eventual $1 Trillion in Buybacks”:

“The Tax Cuts and Jobs Act encouraged the repatriation of profits, which had been subject to additional U.S. levies after it was brought home.

…. The repatriated cash is highly unlikely to create many jobs. Most of it will eventually go to buybacks and dividends. (Emphasis mine)

Goldman Sachs (GS) expects that the total buybacks…in 2018 could exceed $1 trillion.

There’s nothing like throwing $1 trillion into an already insanely overvalued market.

Corporations apparently have nothing better to do with the cash.”

I’m not in favor of buying back stock when the market is at an all-time high. It’s a good time to review your investment portfolio.

• Are your holdings paying down debt with their tax savings?

• Are they reinvesting in their business to create additional profit?

• Are they going further in debt by borrowing to buy back stock at an all-time high?

• Can they pay their debts and dividends without hampering their operations?

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What about government?

Unlike “Zombie” corporations, governments can continue to borrow and pay their debts as long as there are people willing to lend them money. The bigger the risk, the more they pay in interest. Who is buying US debt?

Wolf Richter, writes, “Who Bought the $1.47 Trillion of New US National Debt over the Past 12 Months?”:

By the end of July, the US gross national debt (increased) $1.47 trillion from July last year…. Here’s who bought or shed this paper over those 12 months:

Foreign official and private-sector holders shed $21 billion….

The US government (pension funds, Social Security, etc.) shed $44 billion….

The Federal Reserve shed $128 billion through the end of July as part of its QE Unwind, reducing its pile to $2.337 trillion by the end of July….

So…who bought? American institutional and individual investors, directly and indirectly, through bond funds, corporate or state pension funds…added $1.66 trillion to their holdings over those 12 months!

And here’s how…US debt is now divvied up:

American private-sector investors are buying with a new-found passion….

The fact that the 10-year yield is still so low…shows that there is huge demand for long-term maturities…. And this demand for US Treasuries is…coming from…American investors.”

Government debt is generational theft. One generation borrows and spends, leaving the next generation to pay for it.

The U. S. Debt Clock shows personal debt averages $58,000 per taxpayer. It is dwarfed in comparison to the combined government debt and unfunded promises totaling over $1.1 million per taxpayer.

Should we be concerned about government debt?

Darn right! Tax increases can’t pay off our politicians’ debts. Those supporting tax increases want the money to spend buying more votes. Politicos will fuel inflation – paying interest with devalued, worthless dollars.

When the inevitable downturn comes, the stock market will crash, people will be hurt, the banks will be saved, and the politicos will protect themselves – just like always.

What can we do?

No one knows exactly when it will collapse, many are predicting 2020. (I’m sure the deep state hopes it comes just before the election.) We can’t prevent it, but we can protect ourselves:

• Hold a good portion of “inflation protecting” type assets, particularly gold.

• While 10-year yields are rising, I’m only buying short-term CD’s and bonds I plan to hold until maturity. If inflation comes, and interest rates rise the bond market will collapse.

• Avoid bond funds. Expect liquidity problems. Some funds may have to sell their better bonds to cover redemptions. The price of the fund may take years to recover.

• Review your portfolio regularly. Dump anything close to a “zombie” corporation.

• Keep your stop losses current.

Government deficits matter regardless of which political party is in control. Do we really want to leave this mess to our children and grandchildren? Reigning in the Fed and banks, a balanced budget amendment and congressional term limits would be a good place to start.

In the meantime, when the bubble bursts there will be some terrific values available for those who prepared and have the cash to act!

On The Lighter Side

The Red Sox take on the Dodgers in the World Series. Big TV market teams makes for a dream matchup in the eyes of the TV executives.

The Milwaukee Brewers got hot and ran off 11 straight wins to get to the National League Championship Series, but their luck ran out.

I’d love to see the series go seven games and then into extra innings. I would imagine friends Bob F. and Doug H. will be excited if the Red Sox win it all.

After a poor start, the Northwestern Wildcats are playing well in the Big-10. I hope they qualify for a bowl game again this year.

And Finally…

While we are talking about government debt:

Until next time…