Huge National Debt “Blunts” Prospect for US Economic Growth

Huge National Debt “Blunts” Prospect for US Economic Growth

Huge National Debt “Blunts” Prospect for US Economic Growth


“Be warned, The steady stream of federal red ink is getting to be a deeper shade of Red.”– Barron’s

As increases in annual US budget gap add to national debt, blunt prospects for economic growth, and bode badly for America’s financial future.

The Congressional Budget Office (CBO) recently revised its projections for the US budget in a report that began with an alert that, in FY 2016, the budget deficit will grow, relative to the economy, for the 1st time since Y 2009. In dollar terms, that’s about a $590-B annual gap, $152-B wider than last year’s.

“If current laws generally remained unchanged—an assumption underlying CBO’s baseline projections—deficits would continue to mount over the next 10 years, and debt held by the public would rise from its already high level,” the CBO reported.

“In short, the federal budget deficit is about to explode,” a government-bond strategist wrote for Barron’s.

The agency projected that the debt held by the public will rise 3% to 77% of US GDP (gross domestic product) by the end of FY 2016 this month.

Debt has not hit that ratio since Y 1950, when the US government was still in the middle of paying down the debt it incurred paying for World War II.

By Y 2026, the office sees the debt rising from 77% of GDP to 86%. And it is poised to continue climbing as interest costs on the debt mount, along with payments for Social Security, Medicare, and other government entitlement programs.

A budget deficit is the difference between what the federal government spends and what it takes in.

The national debt aka public debt, is the result of the federal government borrowing money to cover years and years of budget deficits.

“This is a problem. It’s obvious that debts eventually must be paid. We can fret over how that will be accomplished, given the new normal of subdued economic growth (real GDP expansion averaged 3.2% from 1970 to 2000, 1.8% from 2000 to 2016, and 1.4% since 2006) and an aging population that expects to be supported in its grossly underfunded retirement.”

“That isn’t the only concern and may not be the biggest. The problem is that government debt is simply bad for growth.”

“As the CBO study shows, seven years after the trough of the recession, the U.S. is about to see a sharp and lengthy widening of its deficit. That means more Treasury issuance competing with private-sector borrowing, and more uncertainty about how the debt will be paid, probably with higher taxes and/or reduced entitlements.”

“What doesn’t seem likely or sustainable is an increase in the kind of federal spending that brings more growth. Thus, we can expect more middling GDP figures and easier-than-anticipated monetary policy. Even if the Fed hikes short-term rates, longer Treasury yields could fall.”

Notably, some of the highest-profile investment experts have expressed concern over such a scenario.

Jeffrey Gundlach, who oversees more than $100-B  at DoubleLine Capital, warned of a “mass psychosis” among investors piling into debt securities with ultra-low yields.

Bill Gross of Janus Capital Group Inc. compared the sky-high prices in the global bond market to a “supernova that will explode one day.”

Shayne Heffernan, PhD economist and co-Founder of HeffX-LTN has warned about the soaring federal deficit.

“The problem today is that with a high dependency on government support, high levels of underemployment and rising budget deficits, the implementation of austerity measures will only deter future economic growth, which is dependent on the very things that need to be ‘fixed,’” Bill Gross wrote in a recent blog.

“The processes that fueled the economic growth over the last 30 years are now beginning to run in reverse, and when combined with the demographic shifts in the US, the effect could be far more immediate and prolonged than the media, economists and analysts are currently expecting,” he wrote.

“Sacrifices will have to be made, the economy will drag on at sub-par rates of growth, individuals will be working far longer into their retirement years and the next generation of Americans will lead a far different life that what the currently retiring generation enjoyed.”

Tuesday, the major US stock market indexes finished at: DJIA +46.16 at 18538.12, NAS Comp +26.01 at 5275.91, S&P 500 +6.50 at 2186.48

Volume: Trade was moderate with 835-M/shares exchanging hands on the NYSE

  • Russell 2000: +10.0% YTD
  • S&P 500: +6.8% YTD
  • DJIA: +6.3% YTD
  • NAS Comp: +4.9% YTD
HeffX-LTN Analysis for DIA: Overall Short Intermediate Long
Bullish (0.27) Neutral (-0.23) Bullish (0.44) Very Bullish (0.58)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.25) Neutral (0.09) Bullish (0.44) Neutral (0.21)
HeffX-LTN Analysis for QQQ: Overall Short Intermediate Long
Bullish (0.31) Neutral (-0.01) Very Bullish (0.60) Bullish (0.33)
HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Very Bearish (-0.50) Bearish (-0.31) Bearish (-0.43) Very Bearish (-0.75)

Stay tuned…


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