This past week the Congressional Budget Office (CBO) released an update to its economic outlook for the next decade.  It was largely just another news story that doesn’t get a lot of attention with all of the focus on trade concerns, curve inversion, etc.  But the federal deficit figures are large and getting ever LARGER:  $1.2 trillion annually for the next ten years (2020-2029).  Can the country afford this massive debt load? Even if the deficits are “affordable”, there are consequences that must be recognized.

Source: Congressional Budget Office

And because of the recently passed two-year budget agreement, the CBO increased its cumulative forecast for deficits by an additional $809 billion over the next ten years.  In total, the U.S. is expected to add another $12.2 trillion to its national debt based on its projected spending versus tax revenues.  Our national debt stands at about $22.5 trillion as of August 2019.  So, this $12.2 trillion will just go “on the tab” and bring that total to well over $34 trillion by 2029.  And deficits as a percent of GDP are expected to average 4.7% annually. This is a marked increase over the last 50 years, when  they averaged 2.9%.  The point of this commentary isn’t to be negative nor to be alarming.  Rather, it’s just to point out the basic facts of the investing environment going forward and to note that the sheer size of the debt now seems to be accepted as normal, or at worst, ignored by both sides of the aisle in Washington.

As well, we’re currently in the longest economic expansion in U.S. history. We must expect a recession at some point in the future. Unfortunately, we have no reason to believe economic cycles have been eliminated.  And in the next downturn these large deficits will limit the deployment of traditional fiscal stimulus options such as tax cuts and/or increased spending.  The potential outcome of this growing and significant leverage will be higher interest rates.  Right now, the U.S. economy is enjoying a temporary reprieve from those higher interest rates, but the potential is certainly there as these debt levels continue to rise.  And it’s higher rates that will crowd out private investment and in turn economic growth.  As the government borrows more, it competes with the private sector for financing, which drives up the cost of financing.  And that presents a headwind to capital investment with some unfavorable consequences for productivity gains and growth in standards of living.

Source: Congressional Budget Office

At Advisors Capital we have the good fortune to have Dr. Alan Greenspan as our senior economic advisor.  We recently had a conversation with the former Fed Chairman and he spoke of the deficits and the crowding out effect of large entitlement spending.  It’s an excellent interview and worth listening to.  And he writes about these troublingly large deficits and their effects on future growth and private investment spending in his most recent book Capitalism in America, A History.  Dr. Greenspan is clearly concerned about the deficits and future entitlement spending and what they portend for future growth and productivity.  And he’s speaking up now to bring awareness and hopefully some fiscal rationality to Washington.

 

Link to our national debt:  https://www.usdebtclock.org/

About the Author

Paul Broughton

Paul Broughton

Paul Broughton is an equity portfolio manager with ACM. Prior to joining the firm, he was a co-manager of the Salient Dividend Signal Strategy® portfolios. Prior to joining Salient in 2010, Paul held various roles in fixed income portfolio management...
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