Tag: Federal debt

Fitch Downgrades U.S. Credit Rating

Mary Pat Campbell

Link: https://www.wsj.com/articles/fitch-downgrades-u-s-credit-rating-56c73b89?mod=hp_lead_pos1

Excerpt:

Fitch Ratings downgraded the U.S. government’s credit rating weeks after President Biden and congressional Republicans came to the brink of a historic default, warning about the growing debt burden and political dysfunction in Washington.

The downgrade, the first by a major ratings firm in more than a decade, is evidence that increasingly frequent political skirmishes over the U.S. government’s finances are clouding the outlook for the $25 trillion global market for Treasurys. Fitch’s rating on the U.S. now stands at “AA+”, or one notch below the top “AAA” grade.

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Few investors believe that Fitch’s downgrade will immediately challenge that role. Still, it is the first time a ratings firm lowered its headline assessment of the U.S. government’s propensity to pay its bills on time since Standard & Poor’s in 2011 lowered its rating one notch below the top grade. That decision followed another tense debt-ceiling standoff in Congress.

Moody’s, the other member of the three big U.S. ratings firms, continues to give the U.S. its strongest assessment.

Fitch said Tuesday that the downgrade reflects an “erosion of governance” in the U.S. relative to other top-tier economies over the last two decades.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said.

Author(s): Matt Grossman and Andrew Duehren

Publication Date: 1 Aug 2023

Publication Site: WSJ

Hello President Biden, the Ball Is In Your Court

Mary Pat Campbell

Link: https://mishtalk.com/economics/hello-president-biden-the-ball-is-in-your-court

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Excerpt:

Key Provisions 

  • Claw back unspent Covid-19 funds.
  • Impose tougher work requirements for recipients of food stamps and other government aid.
  • Halt Biden’s plans to forgive up to $20,000 in student loans.
  • End many of the landmark renewable energy tax breaks Biden signed into law last year. It would tack on a sweeping Republican bill to boost oil, gas and coal production.

Hello Joe, the Ball is in Your Court

Republicans only had 4 votes to spare but with some last minute haggling, the bill passed 217-215. 

It wasn’t a pretty serve by McCarthy, but the ball cleared the net and landed in play.

The only way to get the ball back in the Republican court would be for the Senate to pass a measure or amend the House bill.

Author(s): Mike Shedlock

Publication Date: 8 May 2023

Publication Site: Mish Talk

The federal budget outlook

Mary Pat Campbell

Link: https://www.brookings.edu/research/the-federal-budget-outlook-2/

PDF of report: https://www.brookings.edu/wp-content/uploads/2023/03/20230313_TPC_Gale_FiscalOutlookFINAL.pdf

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Excerpt:

The basic story is familiar. Low revenues coupled with rising outlays on health-related programs and Social Security drive permanent, rising primary deficits as a share of the economy. Net interest payments also rise substantially relative to GDP due to high pre-existing debt, rising primary deficits, and gradually increasing interest rates. Unified deficits and public debt rise accordingly.

Under current law for the next 10 years, the CBO’s projections imply that persistent primary deficits will average 3.0% of GDP. Net interest payments will rise from 2.4% of GDP currently to 3.6% in 2033, an all-time high. The unified deficit, and even the cyclically adjusted deficit, will exceed 7% of GDP at the end of decade. Debt will rise from 98% of GDP currently to 118% by 2033, another all-time high.

Over the following two decades, the projected trends are even less auspicious. Primary deficits rise further as spending on Social Security and health-related programs continue to grow faster than GDP and revenue growth remains anemic. The average nominal interest rate on government debt rises to exceed the nominal economic growth rate by 2046, setting off the possibility of explosive debt dynamics.  By 2053, relative to GDP, annual net interest payments exceed 7%, the unified deficit exceeds 11%, and the public debt stands at 195%. All these figures would be all-time highs (except for deficits during World War II and in the first two years of the COVID-19 pandemic) and would continue to grow after 2053.

Author(s): Alan J. Auerbach and William G. Gale

Publication Date: 14 Mar 2023

Publication Site: Brookings

Debtor Nation

Mary Pat Campbell

Link: https://reason.org/debtor-nation/

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Excerpt:

Organizations incur long-term financial obligations in forms other than bonds and the U.S. federal government is no exception. Some common types of financial obligations include pension and retiree health care costs for veterans, civilian federal employees, and the general public (through Social Security and Medicare benefit commitments). Looking at the federal government’s balance sheet as of 2021, public holdings of U.S. Treasury securities make up less than one-quarter of total federal liabilities. Unfunded entitlements, like Medicare and Social Security, account for the most at 59% of obligations.

Overall federal obligations have now surpassed $300,000 per American. While substantial in their own right, the debt obligations of state and local governments across the country are dwarfed by the various categories of federal debt.

Author(s): Jordan Campbell, Marc Joffe

Publication Date: 16 May 2022

Publication Site: Reason

Why Interest Rates Could Drive a Debt Crisis

Mary Pat Campbell

Link:https://www.nationalreview.com/2022/02/why-interest-rates-could-drive-a-debt-crisis/

Excerpt:

The average interest rate paid by Washington on its debt has fallen from 8.4 percent to 1.5 percent over the past three decades. However, economic variables tend to fluctuate, and only a fool would assume that a current economic trend will last forever. In the past, economic forecasts and markets told us that high inflation and high unemployment cannot happen simultaneously, that the late-1990s tech-stock bubble wouldn’t burst, and that national housing prices can never fall. Just last year, the Federal Open Market Committee consistently underestimated current-year inflation by three full percentage points. Interest-rate forecasts have proven spectacularly wrong for 50 years.

But now, economic commentators assure us that soaring federal debt is affordable because interest rates will remain low forever.

By contrast, the Congressional Budget Office projects that rates will nudge up to 4.6 percent over three decades. That is easily possible. After all, a broad range of studies show that the projected 100 percent of GDP increase in federal debt over the next three decades should, by itself, add three percentage points to interest rates. Added federal debt over the past 15 years also put upward pressure on interest rates, but this was offset by low productivity, baby-boomer savings, and Federal Reserve policies that pushed rates downward. For interest rates to remain low, those offsetting factors would have to accelerate much further to counteract the three-percentage point effect of future debt.

Author(s): Brian Riedl

Publication Date: 4 Feb 2022

Publication Site: National Review

Opinion: The ‘interest rate comet’ is about to slam into the U.S. economy

Mary Pat Campbell

Link:https://www.cnbc.com/2022/01/27/opinion-the-interest-rate-comet-is-about-to-slam-into-the-us-economy.html

Excerpt:

According to the U.S. Treasury, in fiscal 2021, the amount of interest paid on the national debt was $562 billion including government transfers. The amount actually paid out to holders of U.S. securities was $413 billion.

That figure alone, which is over 20% of what we paid in income taxes in FY 2021, should be alarming when compared to other government expenditures.

Compare the $413 billion we pay in interest to holders of these securities to the annual budgets of other parts of the government. The State Department annual budget is “only” $35 billion and the Justice Department $39 billion.

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Interest rates are still near an all-time low. According to the Monthly Treasury Statement, in 2001, interest paid on the national debt was an average of 5.4%, about 3½ times what it is now.

If we get back to that rate, which is far from inconceivable, interest on the debt would cost American taxpayers $1.4 trillion, based on our present level of national debt. That is twice the budget of the Defense Department.

Author(s): Peter Tanous

Publication Date: 27 Jan 2022

Publication Site: CNBC

McConnell Won’t Block Debt Ceiling Increase, Says He Wants Democrats To ‘Proudly Own It’

Mary Pat Campbell

Link:https://reason.com/2021/12/08/mcconnell-wont-block-debt-ceiling-increase-says-he-wants-democrats-to-proudly-own-it/

Excerpt:

Congressional showdowns over the debt limit are nothing new, but this time around there’s a unique wrinkle. The House approved a bill on Tuesday night with what was essentially a party-line vote that paves the way for Congress to avoid a possible default on the national debt in the coming weeks. Here’s the tricky part: “The measure would create a special pathway—to be used only once, before mid-January—for the Senate to raise the debt limit by a specific amount with a simple majority vote, allowing Democrats to steer clear of a filibuster or other procedural hurdles so that Republicans would have no means to block it,” The New York Times reports.

The upshot, assuming this deal holds up long enough to avert the December 15 deadline for raising the debt limit, is that there won’t be another showdown like this before the midterm elections next November.

Author(s):Eric Boehm

Publication Date:8 Dec 2021

Publication Site:Reason

40 Years of Trillion-Dollar Debt

Mary Pat Campbell

Link:https://reason.com/2021/10/22/40-years-of-trillion-dollar-debt/?utm_medium=email

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Excerpt:

It’s true, of course, that $1 trillion doesn’t buy what it used to. That amount in 1981 would purchase about $3 trillion worth of stuff today. The best way to measure the national debt over long periods of time is to compare it to America’s gross domestic product (GDP), a rough estimate of the size of the country’s economy in a given year.

In the early 1980s, for example, even as the gross national debt exceeded $1 trillion for the first time, the national debt was less than 40 percent of GDP. The national debt is now equivalent to the country’s GDP and is on pace to be nearly 200 percent of GDP by the middle of the century, as this chart from Brian Riedl, a deficit hawk and former Republican Senate staffer now working at the Manhattan Institute, helpfully illustrates:

Author(s): Eric Boehm

Publication Date: 22 Oct 2021

Publication Site: Reason

Yellen Is Wrong. The US Government Doesn’t Always Pay its Debts.

Mary Pat Campbell

Link: https://mises.org/wire/yellen-wrong-us-government-doesnt-always-pay-its-debts

Excerpt:

In 1934, the United States defaulted on the fourth Liberty Bond. The contracts between debtor and creditor on these bonds was clear. The bonds were to be payable in gold. This presented a big problem for the US, which was facing big debts into the 1930s after the First World War.

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So how did the US government deal with this? Chamberlain notes “Roosevelt decided to default on the whole of the domestically-held debt by refusing to redeem in gold to Americans.”

Moreover, with the Gold Reserve Act of 1934, Congress devalued the dollar from $20.67 per ounce to $35 per ounce—a reduction of 40 percent. Or, put another way, the amount of gold represented by a dollar was reduced to 59 percent of its former amount.

The US offered to pay its creditors in paper dollars, but only in new, devalued dollars.1 This constituted default on these Liberty Bonds, since, as the Supreme Court noted in Perry v. United States, Congress had “regulated the value of money so as to invalidate the obligations which the Government had theretofore issued in the exercise of the power to borrow money on the credit of the United States.”

This was clearly not a case of the US making good on its debt obligations, and to claim this is not default requires the sort of hairsplitting that only the most credulous Beltway insider could embrace.

Author(s): Ryan McMaken

Publication Date: 28 Sept 2021

Publication Site: Mises Wire

The national debt is big and getting bigger. Does it matter?

Mary Pat Campbell

Link: https://www.americanbanker.com/news/the-national-debt-is-big-and-getting-bigger-does-it-matter

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Excerpt:

The clock currently reads $28 trillion, give or take, and will grow rapidly in the coming years. The coronavirus pandemic has cost the U.S. economy $16 trillion, give or take, and Congress appropriated more than $3 trillion in aid in 2020.

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The United States has had an up-and-down relationship with debt. One of Congress’s first actions was to assume states’ Revolutionary War debt in exchange for moving the country’s permanent capital to Washington, D.C. Alexander Hamilton saw collective debt as a way to build the nation — and its international credit — and bind the several states together in common cause.

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“I believe it a national curse,” Jackson said in 1824. “My vow shall be to pay the national debt, to prevent a monied aristocracy from growing up around our administration that must bend it to its views, and ultimately destroy the liberty of our country.”

Jackson followed through on his promise, vetoing virtually every spending bill and using federal funds to pay down the debt until it was fully paid off in 1837 — right before a six-year economic depression that pumped it back up again.

World War II ballooned the debt as the nation ratcheted up defense spending to finance the war, causing the country’s debt to rise to more than 100% of gross domestic product. (Debt is usually measured as a percentage of GDP to make it comparable across different periods of time.)

Author(s): Hannah Lang

Publication Date: 3 March 2021

Publication Site: American Banker

Unprecedented federal borrowing floods state budgets

Mary Pat Campbell

Link: https://thehill.com/opinion/finance/556660-unprecedented-federal-borrowing-floods-state-budgets

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Excerpt:

Once per calendar quarter, the state of Michigan conducts a Consensus Revenue Estimating Conference that provides updates on both the national and state economies and the state’s fiscal outlook. The May conference each year is especially significant because it sets the official revenue targets for the next fiscal year’s state budget. 

The May meeting packet contained a broad range of data points, but a few jumped out.

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Another chart broke down the components of personal income. Over the previous four quarters, personal income was nearly $3,000 higher than pre-pandemic forecasts had expected. However, employee compensation actually declined by about half that amount. The entire increase is the result of the 53 percent increase in federal transfer payments that have floated U.S. households over the past year.

Author(s): DAVID GUENTHNER

Publication Date: 5 June 2021

Publication Site: The Hill

Why Investors Can’t Quit U.S. Debt

Mary Pat Campbell

Link: https://www.nationalreview.com/2021/03/why-investors-cant-quit-u-s-debt/

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Excerpt:

Second, there is another $12 trillion in dollar-denominated assets issued by entities outside the United States, according to the Bank for International Settlements. Combine this with the dollar assets exported from the United States, and there exists roughly $32 trillion in relatively liquid and safe dollar assets abroad, as seen in the figure below.

There is no other currency system that comes close to providing so many safe and liquid assets to the world. On one hand, this outcome is not surprising, given the dollar’s dominant role in the global economy. On the other hand, the implication of this fact is astonishing: There is no alternative source of safe and liquid assets available on such a large scale. This means that if investors wanted to break up with the global dollar system, there would be nowhere else to go to meet all their relationship needs.

Author(s): David Beckworth

Publication Date: 31 March 2021

Publication Site: National Review