Rising Debt + Rising Rates

Have they all lost their collective minds? Look I get that some people are leaning Democrat versus Republican and vice versa and that’s fine, but what exactly are voters getting? If, on the one hand, you think Democrats tax and spend too much you get Republicans on the other hand who cut taxes with disproportional benefit to the top 1% and then spend even more. Fiscal conservatives? Please.

In early February the US government was already scheduled to borrow nearly $1 trillion this year. 

A week later and that figure is already out the door as this week both parties agreed to expand spending caps seemingly preparing for World War III. An incremental hundreds of billions of dollars to the military budget alone in just 2 years. What for? To what end? It’s a bonanza for defense contractors surely and the president apparently wants a parade, but have we entered the math no longer applies zone?

The numbers are staggering:

The end result? Much, much more borrowing and deficits into the trillion+ range forever and ever amen:

2019? Looks lot be $1.4 Trillion.

I didn’t see these figures mentioned in any campaign brochures have you? And this is all pre-recession folks. We get a recession and you are looking at 2-3 trillion dollar deficits.

Think I’m going hyperbole on you?

Watch this: Here’s a chart I posted back in 2016 when I called all this Empty Promises. Look at what the CBO then had projected in terms of coming deficits for 2018 and 2019:

I spot roughly $500B for 2018 and a little over $600B in 2019. Now we’re looking at figures double these for the same time frame and that’s ASSUMING the rosy growth forecasts they’ve all baked into these forecasts come to fruition.

These numbers don’t represent a slight increase, they represent a deficit explosion and the CBO forecast from 2016 for the 10 years into 2026 are already hopelessly outdated. At the current rate we’ll be hitting $24 trillion by the next presidential election.

In case nobody has noticed: Rates are going higher and any new borrowing will be at higher rates and old debt will have to be refinanced at higher rates. Reduce tax revenues in the process and you end up with a fiscal disaster.

Indeed rising interest payments will represent the fastest growth line item in the US budget:

“Interest On The Debt Will Be The Fastest Growing Part Of The Federal Budget…By Far. Forget Medicare, Social Security and the Pentagon: $1 trillion-plus deficits means massive increases in the national debt and that debt will have to be borrowed at higher interest rates (see #1). Add the need for the Treasury to roll-over existing debt at higher and higher rates and you get an immediate increase in the amount the U.S. will need to spend on interest each year.”

Watch this space:

Some people may argue that tax cuts will bring in so much economic growth it will all pay for itself. There is precisely zero evidence for such an assertion:

If you know your tax cut history you know where in the chart above major tax cuts were passed. The debt continued to rise and will continue to rise as spending continues to be expanded.

But here’s the kicker: Never in modern times have we seen tax cuts being implemented and spending increased with debt to GDP north of 100%:

Many corporations are drowning in debt, as are consumers, and so are their interest payments:

People invariably argue and say: Yea well, but as a percent of disposable income it’s not so bad. Yes, it’s called artificial low rates, they can mask a lot, but what is currently the situation is not the point, it’s sustainability of debt loads in the very immediate future.

As you saw in the above data we are already seeing a vast increase in interest payments despite rates having barely moved off of the historic zero bound line.

Here’s the prime rate history dating to the early 80’s:

We’ve barely scrapped off the bottom yet.

A sign to cut down on debt?

Nah, just keep charging it:

To fully grasp the depth of the insanity just follow the math:

“As for total debt, the CBO last predicted borrowings of $25.5 trillion by 2027. According to Riedl, the tax cuts, new discretionary outlays and additional interest on the extra spending could add $5 trillion to that number, bringing the total of $30 trillion. That’s 107% of the national income estimate projected by the CBO. The scariest unknown is what happens to interest expense. At $25.5 trillion, the CBO forecasts outlays for interest of $818 billion in 2027. Going to $30 trillion will raise the load to over $1 trillion. One dollar in seven in spending would be going to interest, versus one in 15 today.

And that scenario assumes that the yield on the 10-year Treasury increases to just 3.5% over the next decade, far below its historic average. “If rates go to their average in the 1990s,” warns Riedl, “the deficit will go not to $2 trillion, but to between $2.5 and $3 trillion.

I must repeat: Not one of these projections assume a recession.

So I must ask again: Have they all lost their collective minds? I see no party even pretending to care anymore. Debt ceilings? Gimmicks. Fiscal conservatives? A slogan. Caring about the obligations of future obligations? Nobody cares.

I’ve expressed my concerns before (see below) and the recent data points show an acceleration in debt accumulation into rising rates that takes the breath away.

Related Reading:

For the latest public analysis please visit NorthmanTrader. For our market products please visit Services.

All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

Categories: Opinion

Tagged as: , , ,

21 replies »

  1. Politicians don’t get elected promising to raise taxes and reduce spending. Because the body politic will not elect them. So where is the blame for this insanity? People of all stripes engage in their own form of magical thinking. The end result will be an economic implosion.

      • The finite planet is but one of many in a solar system, continuously bathed in energy and rich in raw materials. The materials in the asteroid belt alone could be converted into Earthlike habitats 1000x the land area of Earth. If your economics demand exponential growth, then the sky is no longer the limit. Will is the limit.

  2. What does it matter at this point? If you’ve ever been above Niagara Falls, you know that there’s a place on the Niagara River called the point of no return. If you’re in a boat and pass this point, the pull of the river is too great for you to save yourself. You’re going over the falls. When it comes to debt and spending, we’ve been past that point for a while now. The best you can do is prepare yourself for what’s coming. It’s unavoidable.

Leave a Reply to Don BelmontCancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.