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Our Treasury Secretary Offers to the Citizenry Public Finances are in Good Shape

CAMS Weekly View from the Corner - Week ending 10/20/23


October 23, 2023


Last Monday our sitting Treasury Secretary Janet Yellen gave an interview to Britain’s Sky News where she was asked if the U.S. could afford to provide military support to Israel and Ukraine which would equate to supporting a two front war.


Importantly the interviewer did not ask whether the U.S. should support (think moral/ethics etc) but rather focused on the outright financial ability of the U.S. to support a two front war via the nation’s fiscal situation i.e. our Public/Federal financial condition.


Importantly we are not leading into an Op-ed edition here on the various geo-political situations currently unfolding but rather use the responses and directives of various DC leadership positions as a launch pad to again highlight the fiscal/budgetary reality of our nation’s finances at the Federal level. It’s your debt citizen you should be fully aware.


Secretary Yellen’s response to the interviewer emphasized that our economy and public finances were in good shape to ensure backing for U.S. interests abroad.


Our Public Financial Picture


In light of our Treasury Secretary’s response let’s take a look.

Gross Federal Debt Chart
www.thechartstore.com

We give a hat tip and a thank you to our friend Ron Griess over at the chart store (www.chartstore.com) for the above chart. We like history here in these editions so for this one we offer some deep history. The above dates back to 1899 (not a typo) and depicts the storyline of our Federal Debt dating back well over a century.


The red line identifies the trend growth rate of our Federal Debt along the path which equates to 9% rounded.


Via the math Ron projects with the well established 9% trend growth rate that we will be looking at $40 trillion Federal Debt (currently $33 trillion) by latter 2025 and by mid-2028 the Federal Debt will reach $50 trillion. Bottom line, in a few years our current $33 trillion Debt reaches $50 trillion if the 9% growth rate holds.


More Perspective


We invite you to look at the chart gradually from left to right. Notice how little debt growth occurred toward the left of the chart and then we see two sudden spikes. Those spikes represented WWI and WWII which required a massive increase in public financing to pay for the war efforts.


In both cases with the follow-on years the debt declined or went dormant in a sideways fashion. This was our general debt historical storyline until the latter 1960’s.


From the latter 1960’s up through current day increasing Federal Debt became a way of life if you will.


Unfortunately as we crossed year 2000 and moved through the 21st century to current day that way of life of increasing Federal Debt went off-the-rails. To underline this via the numbers year 2000 debt went from the mid $5 trillion level to current day $33 trillion-plus which will become $50 trillion in a few short years.


$5 trillion becomes $50 trillion in 28 years if current trends remain. Are we in good shape?


Through this perspective, we as a society as depicted by our Treasury Secretary feel taking on ever growing debt as a “business model” is perfectly fine as though we are paying for programs and endeavors from “operating revenue” (think taxes) when in fact every year we run a notable deficit from spending far more than the tax revenue base provides.


Obviously this has become our collective view as evidenced by the fact that the above numbers and storyline exists. As a nation, citizenry included, we have become apathetic to our public finances.


Public Financial Backdrop in Context of Size of Our Economy


If a head of household or business owner is consistently running their debt growth faster than their income/revenue growth they should fully realize they are running into a financial death spiral.


If they simultaneously convince themselves this operating approach is healthy and is resulting in financial vibrancy concerned on-lookers would call in bankruptcy lawyers. It would only be a matter of time right. Our Public finances square up with this storyline.

Gross Federal Debt as % of Nominal GDP chart
www.thechartstore.com

Above we continue with Ron’s deep historical data view via the above chart. This is our Federal Debt again dating back to 1899. It is placed in context of the size of our economy. As you review the chart think of it as placing debt growth into context of economic growth for our nation.


Simply stated, if the black line is rising it means debt is growing faster than economic growth. If the black line is declining then the economy is growing faster than debt growth.


As offered previously, noting the latter 1960’s and into the 1970’s we see that debt growth consistently outpaces economic growth highlighted by the red upward swooping arrow. Living beyond our means via our Public finances has become an entrenched way of life. This has left us current day where our Public Debt exceeds the size of our economy coming in at 123% or 1.23 times the size of the overall economy as the red arrow points out.


Sadly, as offered, in the 21st century this storyline has gone into hyper-drive as massive debt additions are of no concern and no longer even enter into public debate. (If you are a consistent reader we offer to you; now that’s a megatrend eh.)


The Logical Conclusion


What is expected when debt levels grow without concern? To be fair there are many but one obvious is the follow-on interest expense which adds to and plays a major role in financial death spirals. Ultimately the interest expense becomes such a notable line item that it becomes its own beast if you will.

The above chart notes this 21st century as we use year 2000 as the beginning point. This depicts Federal Government Current Expenditures: Interest Payments.


Note the generally curvy trend with an overall upward tilt. Then our red line notes the catapult higher in recent years. Per the data we are now approaching $1 trillion in annual interest payments. One Trillion Dollars.


The massive level and escalation in interest payments feedback loops to the massive debt issuance of recent years/decades. The rise in interest rates, which plays a role in this escalation of interest expense, feedback loops to price inflation which feedback loops to money printing which, you guessed it, itself feedback loops to the massive debt issuance and deficits as an operating way of life. The hip bone connected to the thigh bone econ style.


With all of the above you can decide for yourself what condition we are in relative to our Public finances being it is debt in the citizenry’s name. As shared, per our Treasury Secretary, we are looking good.


I wish you well…


Ken Reinhart


Director, Market Research & Portfolio Analysis

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