By Tim Courtney, Chief Investment Officer
Recent negotiations regarding the U.S. debt-ceiling limit have pushed the topic of debt front and center. Investors are wondering what this means for markets over the next few months if there is no resolution. This isn’t our first debt ceiling showdown, and like the showdowns before, it is very likely we will get a resolution and move on. But this may not be the healthiest of outcomes from a longer-term perspective. Since we haven’t yet experienced any ramifications for our accelerating debt, the spending has continued to accelerate.
When we imagine U.S. national debt, the “debt clock” often comes to mind — a staggeringly high and constantly rising number that currently sits at around $31 trillion.1 We also owe on state, local and municipal debts, and must take into account unfunded liabilities such as the promises we’ve made to fund Social Security and Medicare. With all of these factored together, the U.S. has promised to pay or pay back over $100 trillion.2 Corporate and consumer debts are on top of all of this.
To put things into perspective, our economy typically generates approximately $25 trillion each year.3 This is not tax revenue, but total production. Our debt will be difficult to repay, but you could certainly argue that the US has grown faster than much of the rest of the world and we could grow our way out of our situation. It is getting harder to make that argument as GDP growth and productivity slows.
America is historically known as a hard-working country with a fast-growing and dynamic economy. We’ve had relatively high productivity gains in the past thanks to investments in technology and labor innovations. However, productivity has greatly slowed over the last decade despite huge spending on technology. And less labor means difficulty in increasing output. The labor force participation rate remains 0.7%4 below its February 2020 level — we’re working less and taking more time off. Work-life balance is good, but it doesn’t help solve our debt problem.
Being the largest economy in the world and having the global reserve currency has afforded the U.S. the ability to make spending and borrowing decisions that other countries can’t. This has worked so far, but things can happen quickly if the market begins believing a country is incapable of paying its bills without perpetually issuing ever higher debt.
There is no free lunch. Although we will likely move on from the current crises before us with little change to markets, the borrowing and spending will be paid for – by everyone. Workers and investors will likely see higher tax rates. Future retirees will probably see benefit cuts. And households will be paying higher prices as inflation can make our debt smaller in real terms. Spending over the last few decades has been unchecked and has accelerated under both parties. If we can’t get spending under control, it is almost certain we will have to take the steps above and live with lower growth rates that come with them.5 As we continue to monitor the debt crisis, please contact your Exencial advisor with any questions.
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