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A Treasury
Department report to Congress last week stated that total U.S. debt will
climb to $19.6 trillion by 2015, as opposed to the 2019 date previously
estimated. Treasury also estimated that total U.S. debt will top 13.6
trillion this year and would rise to 102% of GDP by 2015 as well. And most
astonishingly, the report projected that the publicly traded debt (debt
excluding intragovernmental obligations) would rise to $14 trillion by 2015,
up from last year's debt of "just" $7.5 trillion.
The official
government report was promulgated with the same enthusiasm and fanfare as a
grade school child announcing to his parents he has received his first
"F".
Perhaps most
disappointing for U.S. taxpayers are some robust assumptions made in the
report. For example, the report estimates that GDP will reach $19.1 trillion
in 2015, which would cause the public debt to GDP ratio to only reach 73%.
But just to achieve that undistinguished level, nominal GDP would have to
grow at 5.52% each of those 5 years. Putting that growth into perspective,
from Q1 2006 thru Q1 2007 nominal GDP grew at 4.6%. Between Q1 2007 and Q1
2008 GDP grew at 4.1%. Nominal GDP contracted in the recessionary time frame
between Q1 2008 to Q1 2009. And from Q1 2009 thru Q1 2010 nominal GDP advanced
by just 2.9%.
In order to get
nominal GDP up from the previous year's levels, government can seek to either
grow real GDP or inflate nominal GDP. The problem is that growing GDP when
debt levels are so high is extremely difficult. Precisely because high debt
levels require onerous spending cuts to be implemented, this (in the short
term) can directly lead to a contraction in the private sector of the economy
and a decrease in total output. Delaying that fiscal responsibility only
makes the eventual debt reconciliation much more difficult and is not a
viable option.
Inflating your
way out of the debt situation seems too often a tempting solution. However,
inflation decreases economic growth and sends interest rates higher. The
result is rising debt service along with decreased revenue from a faltering
economy. That pathway doesn't balance the books either.
The best solution
would be to cut taxes in order to stimulate private sector growth and at the
same time to reduce spending in order to bring down public sector
obligations. However, the exact opposite method is currently being employed.
Backing up
Treasury's report to Congress was the release of the Federal Reserve's Flow of Funds Report (Z.1) last week. Not
surprising to this author was the increasing amount of debt the nation
continues to accrue in Q1 2010.
The Federal
Government added debt at an 18.5% annual rate, up from 12.6% during Q4 2009.
Total non-financial debt increased at a 3.5% annual rate, up from 1.3% in the
prior quarter. And total non-financial debt (national, state, local, business
and household debt) breached above the $35 trillion mark for the first time
in history. Therefore, we have succeeded as a country to not only achieve
higher highs in nominal debt, but now have also managed to increase the rate
of debt growth.
Unfortunately,
the deleveraging and healing story cannot even begin to be discussed because
we continue to pile debt upon debt as the proposed solution. Since our
overleveraged economy was the cause of the great recession, how can we avoid
going into a double-dip recession if leverage is still being added?
There can be no
real long term solution other than a protracted period of increasing our savings
as we increase our production. It will be a long, slow and painful process
but one that is absolutely necessary to engender a healthy economy. If we
continue to ignore the only real solution described above, the next downturn
in the economy will be pernicious. What will our government do if a
double-dip recession occurs in the near future? Redouble the Fed's balance
sheet again? Lower interest rates from the current 0-.25%? Or produce another
doubling of government debt outstanding?
None of those
choices appears to be either very appealing or productive. Given Treasury's
recent report on our debt projections, the time left to take the appropriate
actions is running out.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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