mark ballard

Mark's Investment Blog

This blog is intended to keep clients and friends current on my investment management activities. In no way is this intended to be investment advice that anyone reading this blog should act upon in their personal investment accounts. There are other significant factors involved in my investment management activities that may not be written about in this blog that are equally as important as the things that are written about that materially impact investment results. Neither is this blog to be construed in any way to be an offer to buy or sell securities. To be notified via e-mail when new posts are made, CLICK HERE TO SUBSCRIBE

America’s Debt Crisis: A Deep Dive into Our Fiscal Future (Part 2 of 4)

If you missed our first post in this four-part series, we started with a deep dive into government spending over the past 15 years, especially the surge brought on by the COVID-19 pandemic. Today, we continue our exploration by examining the Congressional Budget Office’s (CBO) alarming projections and the broader implications for our economic future.

On Tuesday, June 18, the CBO projected that the federal debt would hit a staggering $50.7 trillion by 2034. Just 10 years from now, our national debt will equal 122% of the United States’ annual economic output (GDP), far surpassing the high set in the aftermath of World War II.

To put it in perspective, the annual deficit is expected to swell to $1.9 trillion this fiscal year and keep growing until the overall national debt hits $50.7 trillion a decade from now. This revised forecast is even grimmer than their projection from just four months ago, which estimated the debt would reach $48.3 trillion by 2034, or 116% of GDP.

But that’s not all. The next 12 months will see significant fiscal policies come into play, further complicating the situation. The Trump tax cuts are set to expire next year, and Congress will have to decide whether to reauthorize them (adding to the debt) or let them expire (leading to steep tax hikes for wealthy individuals and corporations). This decision, along with the impending expiration of the debt ceiling suspension, will set up a political showdown over federal spending.

Moreover, Medicare and Social Security need more funding, which means either higher taxes or benefit cuts. It’s a complex and challenging landscape, and the stakes are incredibly high.

Now, let’s talk about the foreign aspect of our debt. As of December 2022, foreign individuals, banks, and governments held approximately 30% of the total U.S. publicly held federal debt, which amounted to around $7.4 trillion out of $24.4 trillion in total publicly held debt. The top foreign holders of U.S. Treasury securities included Japan ($1.1 trillion), China ($0.9 trillion), and the United Kingdom ($0.7 trillion). In 2022 alone, the interest paid to foreign holders of U.S. debt was approximately $184.4 billion. With higher current interest rates, this total payout will increase even further.

This colossal federal debt will likely keep U.S. interest rates elevated, which will slow economic growth and potentially crowd out other borrowers from the market. High debt levels lead to higher interest rates, making borrowing more expensive for businesses and consumers. This can slow down investment and spending, which in turn slows down economic growth.

Furthermore, when debt levels get extremely high, there’s a risk that investors will start to lose confidence in the government’s ability to pay back its debts, leading to a debt crisis where the government has trouble borrowing money and may even default on its obligations.

In summary, the federal debt’s trajectory is unsustainable, and we need to factor higher interest rates, slower economic growth, and potentially lower stock market returns into our long-term financial planning.

Now, it is more important than ever to have an actively managed investment portfolio with a manager, like BankChampaign, that keeps your investment positioned in the parts of the market that will outperform over the long-term and not just rely on index funds that will be most impacted by the unsustainable growth of our national debt.

Stay tuned for the next part of our series, where we’ll explore potential spending cuts, Modern Monetary Theory, and how we can balance fiscal responsibility with economic growth.

Contact Us

Name(Required)
This field is for validation purposes and should be left unchanged.