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The Sad Tale of the Ever-Increasing U.S. Treasury Debt

 

 

Picture this — it’s June 2, 2023, and the United States just voted to suspend the debt ceiling for two years. Suddenly, the Treasury Department goes on a borrowing spree and racks up a jaw- dropping $1.1 trillion in just two months! This nudges the total debt from a hefty $31.5 trillion to a formidable $32.6 trillion.

It’s like a kid in a candy shop with an unlimited gift voucher — only the candy is borrowed money, and the kid is the U.S. government.

Government Spending Is Out of Control

You might be wondering, “Why on Earth is Uncle Sam borrowing so much?”

The answer to this trillion-dollar question is a tale of two halves — shrinking tax revenue and skyrocketing spending. In the first nine months of fiscal year 2023, revenue shrank by 11 percent, compared to the same period in FY2022. Meanwhile, spending ballooned by 10.5 percent. It’s like watching your bank balance dwindle while your shopping habits spiral out of control. The result? A whopping deficit of $1.39 trillion by June, surpassing the full-year deficit of

$1.37 trillion in 2022. With July, August and September still to come, it’s estimated that the

deficit in FY2023 will reach around $1.8 trillion. While it could be even higher, the Supreme Court struck down President Biden’s college-loan relief plan, artificially keeping the deficit lower.

Here’s a twist in the tale. During the COVID-19 pandemic, businesses and workers were forced into lockdowns, which many argued against. Compensating them for the economic damage that ensued was deemed necessary. Essentially, the government increased its revenue by taxing the very money it borrowed and distributed. This is why revenues are collapsing now that the taxable handouts are over.

Meanwhile, the spending spree continues unabated. It seems that once the government gets a taste for spending, it’s like a kid let loose in a toy store. The emergency spending during the pandemic now looks like it’s here to stay, much like what happened after the 2008–09 financial crisis. At this rate, we might have to start calling it “permanent spending.”

After the June 2, 2023, vote to suspend the debt ceiling for two years, the U.S. Treasury borrowed a staggering $1.1 trillion in just two months. This pushed the total debt from $31.5 trillion to $32.6 trillion. Why has the government borrowed so much?

On the other side of the equation, once the government starts spending more, it rarely cuts back on its budgets. Emergency spending often becomes permanent spending. This was evident after the 2008–09 financial panic, and it seems to be happening again today. While the White House celebrated bringing the deficit down last year, this year it is moving in the opposite direction.

Currently, the federal government is spending a staggering 25 percent of GDP. Throughout history, regardless of tax rates, the budget has never been balanced when spending exceeds

19.5 percent of GDP. It’s a simple equation — the larger the government becomes, the harder it is to grow, which in turn reduces tax receipts. With spending at such high levels, budget deficits have become a permanent feature, and this will only worsen as entitlements for seniors, such as Social Security and Medicare, consume an increasing portion of our GDP in the years ahead.

Things have gotten so bad that on August 1st, Fitch, a bond rating firm, downgraded the U.S. Treasury debt from AAA to AA+. Why? The reasons cited were massive deficits, fiscal deterioration and erosion of governance. This downgrade, similar to the one by Standard & Poor’s in 2011, has created political heat. We can only hope it leads to action.

Of the 14 countries that Fitch has rated AA or above, the United States has the highest estimated 2023 deficit as a percentage of GDP (6.5 percent) and the second-highest interest expense as a percentage of revenues. At over 8 percent for the United States, only the United Kingdom is higher (10 percent-plus), and Canada is the only other country whose interest expense is greater than 4 percent of revenues.

The Unsustainable Fiscal Path and Its Consequences

So, what does this all mean? Politicians understand our fiscal path is unsustainable, yet they continue to spend so they can win over voters. And what’s worse? Voters support them. Yes, you may have paid into entitlement programs, but your taxes were used to pay the previous generation of retirees.

These programs have significant consequences. They distort our decisions and behaviors. Why save carefully for retirement when the government has promised to take care of us? People end up spending more and saving less. As a result, economic growth is hindered, and living standards grow at a slower pace. It’s a vicious circle, and the recent Fitch ratings cut is a clear indication of the severity of the situation.

Both political parties share the responsibility for this dire state of affairs. And to fix it, both parties need to be actively involved. We can complain about governance all we want, but it’s the politicians who use every tool at their disposal to reduce spending who are at least attempting to rectify the situation. Fixing our budget fiasco will require more than just luck. It’s time to consider all options, including cutting spending, before it’s too late.

The Only Solution Is to Cut Entitlement Programs

The challenge is what to cut. Right now, entitlements such as Social Security, Medicare and welfare account for 61 percent of the budget; interest in the debt accounts for about 10 percent and defense spending is about 13 percent. We will have to reduce entitlement spending. This might take the form of means testing or other measures to reduce what goes out. Cutting entitlements has been called “the third rail of politics” because any politician who broaches the subject dies.

In 1981, Ronald Reagan proposed to limit future cost-of-living increases championed by Republican Budget Committee Chairman Senator Pete Domenici, which was backed by 11 Republicans and five Democrats. Reagan told the senators he could not break his campaign promise.

At the same time, administration officials, faced with the prospect of ballooning budget deficits and runaway Social Security costs, considered a variety of measures to save the system, which was facing immediate funding shortfalls in certain programs. David Stockman, the budget chief, generally opted for severe proposals, while Health and Human Services Secretary Richard Schweiker favored more modest changes (some of which had been embraced by the Ford and Carter administrations). The goal was to cut costs by at least $75 billion over five years. At a meeting with the president in May 1981, officials settled on a mixed plan that netted some $80 billion in cuts by reducing aid to students of retired workers, cutting disability payments by tightening eligibility requirements (saving $21.9 billion over five years) and reducing early retirement benefits (saving $17.6 billion over five years).

President Reagan was led to believe that the proposal would sail through Congress. This proved to be a gross miscalculation. On May 20, the Senate voted 96 to 0 in favor of a resolution promising not to “precipitously and unfairly reduce early retirees’ benefits.” The House shortly thereafter voted down cuts in minimum benefits that were part of the package.

In 1985, Republicans in the Senate proposed temporarily freezing the Social Security COLA to help stem the red ink in which the government now found itself drowning. The measure passed only with the vote of Vice President George H. W. Bush’s tie-breaking vote. Ironically, the House, with Trent Lott leading the way, voted it down. In 1986, the Republicans lost control of the Senate. A Republican Senate staff member noted that the message was unmistakable and was seared into the consciousness of the Republican Party, stating, “Social Security is the one area of spending that you must not touch, no matter what.”

How the Federal Deficit Harms Americans

So, why should the average American care about the staggering federal deficit? Because it threatens our economic future.

The U.S. government paid $476 billion just on the interest on its debt in 2022, and that number is expected to rise to $1.4 trillion by 2033. In 2023, the government is spending more on net interest costs than on Medicaid and income security programs!

This runaway spending reduces opportunities for business investment, slows economic growth and increases expectations of higher inflation rates and erosion of confidence in the U.S. dollar. The debt puts us at greater risk of a fiscal crisis, and it leaves our most vulnerable citizens at risk of potentially seeing reduced benefits in Medicaid and Social Security in the future.

What You Can Do

As individual Americans, there’s not much we can do about the federal deficit. What we can do is prepare well for the future. The worse things get at the federal level, the more important it is for you to protect your hard-earned wealth for your future and that of your family.

For three decades, our team at Carver Financial Services has been leading our clients to establish, and then focus, on their own personal vision for the future — regardless of, or in spite of, what’s happening with the economy.

Please contact us at (440) 974-0808 or randy.carver@raymondjames.com to discuss your goals and objectives. There is neither a cost nor any obligation. We look forward to helping you preserve your wealth for generations to come.

 

Randy Carver, CRPC®, CDFA®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Carver Financial Services, Inc.,was established in 1990 with the vision of making people’s lives better — clients, team and community. With this mission, Carver Financial Services has grown to be one of the largest independent financial services offices in the country, managing $2.3 billion in assets for clients globally, as of March 2023. You can reach Randy directly at randy.carver@raymondjames.com and in the office at (440) 974-0808.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Ratings provided by nationally recognized statistical rating organizations, also called ratings agencies, are appraisals of a particular issuer’s creditworthiness, including the possibility that the issuer will not be able to pay interest or repay principal. Ratings are not recommendations to buy, sell or hold a security, nor do ratings remove market risk. A credit ratings is subject to review, revision, suspension, reduction or withdrawal at any time, and a rating agency may place an issuer under review or credit watch. More about ratings is available at and fitchratings.com.

 

 

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