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.
Sources:
1. Business Insider – The government shutdown is in day 35 and has shattered the record for the longest shutdown in history
2. CNN.com – Trump concedes to temporarily end shutdown — without wall funding
3. CNBC.com – Here’s who the partial government shutdown affects
4. Forbes – The government shutdown cost the U.S. economy $11 billion
5. The Balance – National debt by year compared to GDP and major events
6. The Balance – Who owns the US national debt?
7. NPR – U.S. national debt hits $22 trillion — A new record that’s predicted to fall
8. Lit2Go – “The Boy Who Cried ‘Wolf’”
9. The World Bank – Central government debt, total (% of GDP)
10. The Balance- Why the U.S. dollar is the global currency
11. Reuters – U.S. households, businesses see good times ahead: Fed
12. The Balance – Current Federal Reserve interest rates and why they change
13. The Hill – Treasury hits largest April surplus on record at $214.3 billion
14. The Balance – Interest on the national debt and how it affects you
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.
