US Federal Budget Deficit in $Trillions
On Stuart Varney’s Monday morning show on Fox Business, he answered the question as to why the vast majority of American people aren’t feeling good about the US economy. His answer was brief and to the point: “Everything costs more. Everything.”
Varney was talking about the every-day products that Americans buy: “Insurance, dry cleaning, the dentist, the doctor, drugs, cereal, bread. Buy just about anything and you see it costs more.” Varney is right, but just as importantly, you could say the same thing about most financial assets. Whether it’s the price of Gold, Bitcoin or the US stock market, they all have made new record highs this year; and although the US Federal Reserve has started to reduce short term interest rates, longer term rates have not followed, and they too have surged higher.
Why has this happened, and will the situation get any better under a President Harris or a President Trump? Sadly, we think the answer is most certainly not, and the underlying reason is the fiscal irresponsibility – you might say fiscal insanity – of the Federal government. The United States is simply spending significantly more than it is receiving in taxes.
This year was no different. Despite the fact that U.S. tax receipts hit a record $4.919 trillion, up 11%, the US budget deficit for fiscal year 2024 grew to $1.833 trillion, the highest amount ever outside of the COVID era. The biggest driver of the deficit was a 29% increase in interest costs for Treasury debt to $1.133 trillion, an amount greater than we spend for Medicare and Defense. What is even more galling is that foreigners own approximately 25% of our debt, so about $283 billion in interest payments flies right out the door to foreigners, and thus does not directly benefit American citizens.
Last year, in our April Fools article entitled: It's Christmas Every Day of the Year!, we excoriated the Biden/Harris budget proposal, which if adopted, projected an average annual deficit of easily more than $1.6 trillion for each of the next ten years. This promised deluge of red ink would result in a total Federal debt level which would make today’s monstrously high-level look like chump change.
Unfortunately, Vice Presidential Harris has gone further, promising tax breaks for favored interest groups, price controls, significantly higher taxes on the rich, and even a tax on unrealized income. It’s more than enough not to vote for her.
On the issue of taxes and its effects on the Federal deficit, former President Trump doesn’t look much better. He wants to extend the tax cuts enacted in his first term in office, and has promised or said he would consider a myriad of additional tax breaks: no tax on tips or social security benefits, exempting police officers, firefighters, active duty military and veterans from paying taxes, making interest on car loans fully deductible, among others. While The Donald has proclaimed that higher tariffs will more than make up for any resulting shortfall in tax receipts, we are doubtful, and even if he proves correct in the long run, we think his tax policies will continue the trend of a frightening increase in federal debt levels during his last four years in office.
Of course, taxes are only one part of the problem. The sharp and uncontrolled increase in federal spending has been a major cause of higher inflation and the increase in federal debt levels. In our opinion, Trump’s prior record and his rhetoric should lead to a much better result. You can say what you want about the overall merits of immigration, but the United States has spent hundreds of billions of dollars to support migrants, and that source of federal spending will dramatically slow if Trump cracks down on illegal immigration as he has promised.
We would also say the same about our involvement in foreign wars. Unlike all prior Republican and Democratic Presidents, Trump did not get us involved in new foreign wars, and we believe that will continue if he is elected once again. Reduced spending on failed foreign wars will be a good thing!
However, all this means nothing, if there is no meaningful reduction in mandatory (entitlement) spending, which makes up 70% of all federal spending. Neither major candidate promises to do anything to reduce this spending in the future, so we believe the Federal debt level will continue to sharply increase, no matter who is elected President.
I think that is what the financial markets are telling us. Higher gold prices along with higher long-term interest rates ordinarily correlate with higher inflation, and that combination ordinarily is bad for stock prices. This time, however, gold, stocks and long-term rates are all going up together.
Why? Look no further than the huge Federal debt. The Federal Reserve desperately needs to reduce interest payments on the growing federal debt, and thus is acting to lower short term rates. However, long-term rates are not cooperating and moving higher instead. Ultimately and maybe next year, we think the Federal Reserve will be forced to monetize the federal debt by buying long term debt instruments issued by the US Treasury. The resulting flood of liquidity will push all prices higher.
Varney is absolutely correct. “Everything costs more. Everything.” And it will in the future, too.
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