Author: Tim Courtney
After lasting 35 days,1 the longest government shutdown in U.S. history at least temporarily ended on Jan. 25, 2019.2
The impact of the initial shutdown has begun working through the economy as more than 420,000 federal employees worked without pay for five weeks, while another 380,000 were placed on unpaid temporary leave.3 The Congressional Budget Office (CBO) reported a cost of $11 billion due to lost output from workers, delayed government spending and reduced demand.4 However, most of the short-term economic damage should be gradually alleviated as federal employees are working again and receiving back pay.
While this can have negative effects to our economy in the near term, we believe that our growing national spending and debt is the much bigger risk story for the U.S. economy. The U.S. national debt is valued at just under $22 trillion, greater than our annual gross domestic product (GDP),5 which is currently estimated at about $21 trillion. If you exclude debt that is owed to intragovernmental entities such as the Social Security Trust Fund6, the debt still stands at about $16 trillion and 77 percent of GDP – a higher percentage than any time since the years immediately following World War II.7 The CBO estimates this percentage will grow much higher over the next decade.
Because this topic has been raised for years, many U.S. citizens respond to these numbers similarly to how the citizens respond in Aesop’s Fable, “The Boy Who Cried ‘Wolf.’”8 There haven’t been adverse consequences to date, and thus we should be wary about future warnings. Many also think that if debt were to become an issue, there are many other countries, such as Japan and Brazil, that would be negatively impacted well before the U.S.9 You may have heard the saying that relatively speaking, “the U.S. is the cleanest shirt in the dirty laundry.”
There are reasons to think that the U.S. could escape some of the worst potential consequences of our debt. The U.S. dollar is still the de facto global currency10, the U.S. has one of the most dynamic economies and U.S. households, which back the U.S. government, have incredible wealth and purchasing power relative to the rest of the world. 11
However, even with modest interest rates12 and record inflows to the Treasury,13 the U.S. government hasn’t come close to funding its spending level. Interest, as a percentage of our spending, has steadily crept higher and is now close to 9 percent annually.14 If we add in state/municipal debt and unfunded liabilities such as Social Security and Medicare at the national level and pensions at the local level, the numbers are, at a minimum, sobering.
While Exencial has never made U.S. spending and debts a focus of our planning and investment discussions with clients, we do believe that this issue is like so many others when it comes to markets and economics: there is no free lunch. We are almost certainly reducing future growth by bringing it forward into the present. To meet these debts and liabilities it may be that current tax rates will be the lowest that we will see for the rest of our lives, that entitlements will be limited, that retirement ages are extended and/or that these debts begin to pressure the dollar lower (inflation higher).
So while spending and the national debt may not lead to insolvency, the market will likely ensure that it gets repaid through any number of ways that affect our lives.
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