Tag Archives: Federal Debt



There is lots of additional news, all of which only serves to intensify the financial distortions that we have been describing for years. With the US election just days away, there seems to be nobody that expects government (fiscal) or federal reserve bank (monetary) support to be reduced after the election. It is virtually certain to be quite the contrary. Below we will hit a few “high” or perhaps “low” points, while quoting several more well known authorities than ourselves.

We have described many times how debt issuance brings forward demand, at the expense of future consumption. We have also pointed out, as Reinhart and Rogoff described over ten years ago in “This Time is Different” (chronicling 800 years of business history) that once government debt reaches approximately 100% of GDP it is a noticeable drag on productive growth.

Lacy Hunt and Van Hoisington of Hoisington Research said recently: “Countries in a debt trap (our italics) like the US, Japan, the UK and the Euro Area have experienced a fall in short term interest rates to the zero bound, in some cases into negative rates, thus eliminating monetary policy to play a role in supporting the economy.” In other words, once at zero, below zero can’t help much.

Hunt and Hoisington described the increasing burden of the debt buildup this way: “As proof of the connection (between debt and GDP slowdown), each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980s was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.”

Hunt and Hoisington also said “Debt financed fiscal policy can provide a short term lift to the economy that lasts one to two quarters. This was the case with….2009, 2018 and 2019. However, the benefit of these actions…even when the amount of funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects remain. The multi-trillion dollars borrowed for pandemic relief in Q2 encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute (our italics) at 90%.”

Keeping the above in mind, we present the following chart, provided to us within our subscription to Grant Williams’ “Things that make you go hmmm”. Shown are examples of what was going on, describing profound societal adjustments that have accompanied the debt levels of today. Fifty one out of fifty two times in the past, when debt gets to 130% of GDP, the country eventually defaulted  on its financial obligations, one way or another, which is exactly where the USA is right now.

As the final footnote to this discussion, to demonstrate how dramatic the government intervention has recently been: the legendary investor, Howard Marks, pointed out recently that: “in the four months from mid-March to mid-July of this year, the Fed bought bonds and notes and other securities to the tune of more than $2.3 trillion. That was roughly 20 times what it bought in 18 months during the Global Financial Crisis (of ’08-’09).”  We have it it this way: the “drug addict needs an increasingly powerful ‘hit’ to maintain the ‘high’”.

Take all of this under consideration as you position yourself financially.

Roger Lipton








We all hope that, after 7-8 years of sub-par growth in the wake of the ’08-’09 financial crisis, the economy will finally pick up steam as the new administration implements more business-friendly policies. Ronald Reagan took office, in January 1981, following the stagflation of the 1970s, also promised less government intervention, controlled spending and lower taxes. In short, he promised fiscal and monetary measures that would stimulate the job-creating private sector, in turn nurturing consumer confidence and spending.

There are however, HUUUGE differences between the economic situation that Reagan inherited versus the current situation. There are always situational differences, but the following facts will provide serious impediments to economic progress.

From a monetary standpoint:  the Fed Funds Rate at 12/31/80 was TWENTY PERCENT. The 10 year treasury note yielded THIRTEEN PERCENT.  Today the Fed Funds Rate is 0.4% and the ten year treasury yield has moved all the way up to 2.2%. The reduction of interest rates will help any economy, and by 12/31/1982 the fed funds rate had been reduced ten points to 10%, and the ten year treasury yield was down 3 points to 10%. Rates moved still lower by 1984-1985 when the economy finally strengthened. Obviously, DJT does not have this option. To the contrary, rates are trending higher since the election, signaling the possibility of a higher inflation rate and/or slowing potential economic gains.

From a fiscal standpoint: both parties have been talking about substantial stimulus, and there appears to be bipartisan support for a major infrastructure spending program. Ronald Reagan increased government spending but he inherited a far less leveraged situation, at a run rate as well as cumulatively. The 12 month trailing deficit in 1980 was about 1% of GDP. The same measure today is 3%. The cumulative debt in 1980 was 32% of GDP and today it is about 107%. Obviously, the inherited problem in terms of debt is A DIFFERENT ORDER OF MAGNITUDE.

Further, from a fiscal standpoint: The new administration is well aware of the need to control government spending and not  increase the debt load. The very low interest rates have allowed for the higher debt without too much burden on the budget. More on this in a moment. However, the realities include the following: In 1980, Medicare and General Health Spending was 9% of the budget. Today it is 25% and no one expects that this can be reduced. However Obamacare is restructured, lower government spending in this area will not happen. National Defense spending was 23% in 1980 and today it is about 14%. That 14% will likely move up much closer to 23%. A dramatic situational comparison is the “modest” 5% of the budget spent on interest today, versus 9% in 1980, on more than 20 times the debt. With 19.7 trillion of debt, and rising, each point increase on the total (the weighted average maturity of which is 5.65 years) would be $197 billion or an incremental 5% of the budget. Higher interest rates could therefore be an important hindrance to legislators as they attempt to keep government spending under control.

As described above, between health spending, defense spending, and interest costs, even before considering a large infrastructure spending program, our leaders will have options seriously limited by inherited financial realities. Overall, non-discretionary spending that includes entitlements, health expenses and defense spending amounts to about 75% of the total budget. The 25% that is “discretionary” includes departments like Education, Housing, Energy, Commerce, Agriculture and Community. Even if these departments are restructured, the larger categories mentioned above still dominate overall spending and the resultant deficits.

We haven’t seen the above hard facts discussed, (might have missed it, I suppose) before or after the election, as both parties have provided the typical campaign promises of better (and cheaper) health care, better education, more high paying jobs, ongoing social security and disability benefits, tuition debt relief, higher defense spending (by DJT), etc.etc.etc.  This is before even discussing new social programs or infrastructure construction. A presidential choice has been made, but either candidate would have faced the current unprecedented financial realities  as described above. I suggest we hope for the best, but be prepared for something less than an ideal outcome.