The total level of US Government debt has reached USD $35 Trillion. The current US fiscal position has a debt to GDP of 120% and according to many views including Reinhardt and Rogoff who produced papers in 2010 and 2012 a level of debt to GDP above 90% sees a dramatic worsening in growth outcomes for economies.
Note this debt figure does not include the notion of Unfunded Liabilities which includes its obligations based on expectations these payments must continue such as Social Security and Medicare. The level of what these unfunded liabilities will add up to depends on who you ask and the assumptions you make. At this time let’s just assume it is a lot (I have seen estimates of USD $100 – 200 Trillion).
The Federal Budget deficit in July 2024 was the second-highest on record.
So how is the money spent?
Let’s take a look at the month of July and the breakdown of revenue and expense.
“True Interest Expense” which includes Social Security + Medicare + Net Interest + Health + Veterans Benefits. is about 91% of tax receipts this year and is expected to get close to 100% as US debt expense recalculates based on higher rates as it rolls off previous terms (hence rates).
We also note that regardless of who wins the US election the underlying fiscal position of the US will not improve. The latest Congressional Budget Office 10-Year projection shows that US federal debt is expected to be USD$20 Trillion higher in 10 years time. Currently, the US has USD $35 Trillion in debt (not counting unfunded liabilities). We note that an average cost of debt at approximately 3.4% this means the annual interest expense is around USD $1.2 Trillion. In the context of the fact tax receipts of USD $4.9 Trillion and the fact that the US spends around USD $0.9 Trillion on defence and USD $4.1 Trillion on other mandatory expenses none of these metrics look good.
This leaves the US with the following choice of how to deal with this issue;
- Austerity (Cut spending)
- Raise Taxes
- Inflate away the debt
Politically the last option is more palatable and has been the course pursued by others in history faced with this predicament.
In future blogs we will look at what the large level of debt means for the US government and financial markets more generally.
Article by: Rob Coyte, CEO, Shartru Wealth Management