The Congressional Budget Office has just provided us with some new guesses on what the future is going to look like in the United States.
Right now, the CBO sees the US government debt load to be 195 percent in 2050. That is, government debt, as a percentage of nominal Gross Domestic Product, will be close to 200 percent. Next year, this government debt will only be around 100 percent.
The major reasons for this:
surging outlays to combat the pandemic, followed in later years by rising interest costs and higher spending on safety-net programs such as Social Security and Medicare.”
CBO Director Phillip Swagel states,
There is no set tipping point at which a fiscal crisis becomes likely or imminent.”
Whew! Thank you Mr. Swagel, you had me worried there for a minute.
But, Is The Economy Going To Be Growing?
Yes, the economy will be growing, but the CBO projects that average annual real GDP growth will only be 1.6 percent during this time period.
Actual real GDP growth between 1990 and 2019 was 2.5 percent.
Whoa! And, we thought that the growth rate in the 1990 to 2019 period was slow.
Well, the CBO points to slower labor-force growth coupled with even less business investment, which will continue the lagging growth in labor-force productivity. This is roughly the same performance that has been achieved over the last ten years or so, since the end of the Great Recession.
So, economic growth is going to be really slow!
Well, there is no specific information on inflation, but we can make some guesses from the CBO’s discussion of interest rates.
Nominal interest rates, you remember, contain a component that is related to inflationary expectations. As inflation increases, inflationary expectations will rise and nominal interest rates will also rise.
This is the picture we get from the CBO. Right now, the Federal Funds rate is near zero and the CBO argues that the Federal Reserve will keep this rate near zero until 2026. Then the interest rate will rise gradually, reaching 2.4 percent by 2030. This “more normal” level will then be maintained throughout the rest of the period.
Longer-term interest rates will rise, but given this scenario, the yield on the 10-year US Treasury note, sitting around 0.670 percent, will rise to a “more normal” level but one could expect this in the 3.00 percent to 3.50 percent range.
If this is the case, I would expect that inflationary expectations would be only a little higher than they are now, which for the 10-year note is around 1.65 percent.
Thus, in my estimation we would have, on average, during the 2020 to 2050 period, economic growth around 1.6 percent and inflation around 1.65 percent, giving us a growth rate for nominal GDP of about 3.25 percent.
Information From the Bond Market
It is interesting to see that this projection, at least for the next 10 years, is not that different from what is built into the current bond prices.
Investors are obviously seeing the same kind of future for the US economy that is being projected by the people at the Congressional Budget Office.
Furthermore, Mr. Swagel, Director of the CBO, adds that he does not see “an identifiable point at which interest costs as a percentage of GDP become unsustainable.”
The US is not facing an immediate fiscal crisis.”
Yet, the slower growth will make it harder for the government to reduce the debt burden as a share of the economy.
But What About Other Areas Of The Economy
The accumulation of government debt is not the only debt issue in the country. For specifics in this area, I have just written about the debt/bankruptcy issue in the oil industry. Then there is the same problem being faced in commercial mortgages. And, I could list several more areas where debt overload is a major problem.
The point being, the United States has a real debt problem on its hands. Since the early 1960s, the federal government has been following a policy I have called “credit inflation.” This policy was intended to achieve lower rates of unemployment in the economy over time. The result of the policy has been to keep the economy growing, achieve relatively high rates of employment while at the same time keeping the price increases of goods and services at an acceptable pace.
What happened, however, is that the “credit creation” did not go into the production of consumption goods or into the production of real physical capital. It went into the financial circuit of the economy producing asset price inflation, something that a lot of people got really wealthy off of. Financial engineering and financial innovation became major parts of economic activity.
Is Credit Inflation At An End?
The real question now is whether or not credit inflation is at an end, a result of the coronavirus pandemic and subsequent severe recession?
Debt is accelerating everywhere. As just mentioned, this is happening both inside and outside the federal government. And, the slower growth, as mentioned above, makes it harder for the government to reduce the debt burden. It also makes it harder for corporations and other business enterprises to cover cash outflows, thereby threatening their ability to cover debt payments.
Excessive debt issuance always comes back to bite you. Usually, things go along smoothly until you hit a “bump in the road.” Then, everything tends to fall apart. The question is, does the coronavirus pandemic represent the “bump in the road” to our recent acceleration in our debt load?
If the CBO is close to being right about its projections, the slower economic growth is not going to allow everyone to cover their debt payments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.