Ignored but true: All the projections about coming growth as a result of tax cuts have been proven wrong. All the promises that tax cuts would pay for themselves: Wrong. All the promises that we will pay off the debt: Wrong.
I know, I know, for years the ballooning debt hasn’t mattered and that fact appears to give license to those that argue that debt doesn’t matter. Yes, nothing matters until it does.
Yesterday the Congressional Budget Office (CBO) released its latest budget outlook and it’s grim. Again.
Trillion dollar deficits as far as the eye can see, for every year in the coming decade and debt ballooning into the stratosphere:
We’ll be drowning in debt.
Every pretense to care about debt or deficits has entirely vanished from the public political discourse. Although it doesn’t take a Nostradamus to imagine Republicans to suddenly rediscover fiscal concerns whenever they will be no longer be in power at some point in the future. Perceived hypocrisy aside fact is both parties, divided as they may seem, agree on one thing absolutely: Approve every budget. With no fiscal discipline on the horizon the CBO projections appear right on the money.
Except of course they are not for they don’t model a recession into the future. Ever:
Reality is debt and deficits expand on an even more accelerated pace during recessions as the government needs to lay out benefits and find ways to stimulate a shrinking economy.
Over the past few decades increased debt spending in conjunction with loose monetary policy has been the primary fuel to keep minimizing the impact of recessions. Recessions are naturally not popular and they’re not conducive for electoral politics. Hence they must be avoided at all costs and be kept to a short a time period as possible.
I’m all for that of course, for who wants millions of unemployed and high poverty rates? I don’t, but the issue is that we’ve expanded on an ever more consequential boom and bust cycle. It takes ever more debt to produce ever less incremental growth:
And here we are, at this point in time of a very aging business cycle at the beginning of a decade long run in trillion dollar deficits to come:
This is the starting point, not the end point. Ponder that.
But oh all that stimulus producing growth? All nonsense.
It didn’t happen:
Donald Trump December 16, 2017:
“The economy now is at 3%. Nobody thought it would be anywhere close. I think it could go to 4, 5, and maybe even 6%”https://t.co/99lEGBKIXE
Latest GDP Now: pic.twitter.com/ka5dl5ZHWh
— Sven Henrich (@NorthmanTrader) January 29, 2020
What did happen is that corporations made out like bandits seeing their tax contribution plummet in historic fashion:
Now we hear promises how the debt can be paid if the Fed would just reduce interest rates further:
The Fed should get smart & lower the Rate to make our interest competitive with other Countries which pay much lower even though we are, by far, the high standard. We would then focus on paying off & refinancing debt! There is almost no inflation-this is the time (2 years late)!
— Donald J. Trump (@realDonaldTrump) January 28, 2020
Show me the countries with lower and negative rates that are paying off their debts. They don’t exist. Except Germany perhaps because it’s running a budget surplus. Remember those?
Global debt is higher than ever precisely because of artificial low rates:
Low rates enable poor fiscal discipline, it makes poor discipline appear consequence free.
But there’s a larger problem with the argument that lower rates help pay off the debt. Basic reality.
If low rates helped to pay off the debt then zero rates for years did nothing of the sort:
Fact is interest on debt increased as did debt during times of zero rates. But just the slightest increase in rates produced an accelerated curve in interest on debt. So much debt has been accumulated that higher rates are virtually impossible to sustain the vast amounts of debt.
The truth is we’re all trapped in a historic debt cycle that requires ever more debt for ever less incremental growth. But nobody wants to hear the truth because it is unpopular:
Problem is in the fanatical quest to prevent any and all recessions we keep creating ever bigger bubbles and bust cycles while never really cleaning out the excess, hence the debt burdens & obligations become an ever larger drag on future growth.
— Sven Henrich (@NorthmanTrader) January 29, 2020
Worse: As the debt trap becomes ever more daunting the fear of a recession becomes ever more pronounced. And rightfully so. Corporations and the top 1% have reaped most of the benefits of the debt and easy money cycle. And while workers can take comfort in a current low unemployment rate they also must know that they are the first sacrificial lamb when the next recession hits. It’s not the executives that get laid off, it’s the front line workers that get to experience the new round of “right sizing” in the name of efficiency.
Yes, things always look best during the boom. But it’s understanding the price paid for the boom that informs who pays the bill once the bust triggers.
This boom has been financed with debt and the world is now drowning in debt like never before with no end in sight and zero leadership anywhere on the horizon to fix it. The Trump administration is already touting new tax cuts, those on the left offer programs such as student loan forgiveness which gets the taxpayer to take on the debt and central banks encourage governments across the globe to engage in “fiscal stimulus” which is code for more debt.
Debt won’t matter until it does, but be aware, what’s unfolding here is a history tragedy and the next bust cycle will haunt all of us.
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When this gigantic ponzi debt bubble burst…it will be the “end”.
Outstanding research/truth/analysis, Sven.
CBO has one report, wait until GAO comes with its results of the fnancial audit on the Schedule of Federal Debt. That’s always a fun read@
Great Sven, couldn’t agree more. Japanification of the whole word is underway, it’s clear that history is not of a guide, and common sense has become nonsense. Central Banks are feeding oligopolies, brutally squeezing free competition, market forces and suppressing the anlimal sprits of millions of small entrepreneurs. Debt is the new addiction and nobody wants to go and look for a cure, as there’s a price to pay. Better turn your head and look in other directions. Who will be able to build resilient, skilled and local based economies, discarded from this sick financial order will be able to better survive the big bust.
Debt does not matter as long as risk assets continue to inflate daily. What may matter is the coronavirus, which is most likely being data manipulated by China to contain fear and market fallout. Anyone else notice the “Grave Concern” comments at CNBC from a Who Director today? 20% severely ill (pneumonia and respiratory failure)? If the China pandemic does not clear up by end of March, China GDP will be less than 5% (meaning 3% actual growth). China will need to launch a huge debt fueled stimulus plan soon. Long live debt…
WHO Director-General Tedros Adhanom Ghebreyesus said the “continued increase in cases and the evidence of human-to-human transmission outside of China are, of course, most deeply disturbing.” The illness produces a range of symptoms with about 20% of the patients becoming severely ill, including pneumonia and respiratory failure, he said.
Federal government debt is about 1/3 of total US debt. It is a mistake to focus on just government debt. It sets peoples minds off into the weeds. What counts is total debt and that’s probably near 350% of GDP. There is so much dodgy debt out there that US government debt is the least of the problem. It isn’t nothing but it is far from #1.
I suggest that all articles on this topic of gross debt actually use gross debt.
Thanks for analyzing and explaining that, Sven. Very lucid, and unfortunately it rings true. If there was actual fiscal discipline in Congress, then it might be possible to pay off government debt, and other debt, on lower interest. But, despite all the talk over decades, there seems to be next-to-no inclination to reduce debt or deficits.
So maybe it’s a debt crisis that the Fed is attempting to fight with all the extra liquidity, without wanting to announce that they know it’s becoming a crisis?
Animal farm, eventually the sheep will bleat for a pound of flesh ( Pork ) but their circumstances won’t change for the better.
Debt is the financial tool of growth debt can be good for all but the average person buys bad debt liabilities car, house, clothes, electronics, college degree etc. instead of buying good debt that creates assets and cashflow rental properties, businesses, commodities, land.