I am of an age where any reminisces I might have come across as waxing nostalgic to young people. Yes, I remember when I could buy a Sprite in an insulated bottle at barbershop for 15¢. The phone plugged into the wall, and you had to go to the theater in order to watch a movie.
All of it and more.
In my youth and early adult years, people still got their news from the television, newspaper and even radio. Even then, what passed for news was often hours, if not days, old. Further, given the relatively limited number of media outlets, we didn’t know what every member of Congress felt about every issue.
There weren’t untold websites, television channels and blogs trying to generate content 24/7/365. Perhaps that might be a reason we were all, arguably, a little more trusting back in the day, if not a little naïve.
In talking with some of our young associates at Oakworth, they found the events in Washington this week surprising, but not necessarily shocking. In fact, one person told me “his generation” views the recent behavior as the norm, to be expected.
And why shouldn’t they? What with public faith in all of our levers of government at or near all-time lows? After all, if you don’t expect anything out of someone, you aren’t surprised by anything they do.
Now, you might be wondering whether I am really going to “go there.” Am I going to turn this into a political screed and really vent my spleen? Perhaps, but not how you might imagine.
Here is the cold hard truth.
The US national debt is currently in excess of $33.4 trillion.
Depending on when, or if, you follow the hyperlink it could be significantly more. Also, as I have mentioned in this blog on more than one occasion, the US Treasury is currently projected to run up an additional $19.9 trillion in debt by the end of 2033.
That would take the accumulated national debt to well over $50 trillion over the next decade. Obviously, that is a dizzying amount of money the Treasury is going to have to finance. So, the question is from where will Washington find the money?
Some of you might be thinking: “Come on Norris, it isn’t the absolute of the debt which is the problem. It is its size relative to the size of the economy.” Fair enough, I concede the point. However, just grant me the privilege of doing the math.
At the end of the 2nd Quarter of 2023, the Bureau of Economic Analysis (BEA) estimated US Gross Domestic Product (GDP) to be $27.063 trillion in US nominal dollars. As such, while an imperfect calculation, US national debt relative to GDP is $33.4 divided by $27.063, which equals 123%. Believe it or not, that might be manageable.
No? Ever had a mortgage higher than your salary?
Admittedly, that 123% figure might not be the so-called official number you see floated around. Still it is what it is, a calculation using two publicly available data points. But what will this ratio be in 2033?
A ha.
This is where we have to make some assumptions about future GDP growth.
Will it be 1.5%, 2.0%, 2.5%, or 3.0%? Those are the only options.
Let’s start with 3.0%. If the economy grows at that annualized rate for the next 40 quarters, starting with the end 2Q 2023, it will be roughly $36.37 trillion on June 30, 2033. The math is (1.03^10) * $27.063 trillion = $36.37 trillion.
If the economy grows at a probable case 2.5% clip for the next decade, the economy will be about $34.64 trillion at the end of June, 2033. Again, the math is (1.025^10) * $27.063 trillion = $34.64 trillion.
Now, if the economy grows at a not hard to imagine 2.0% rate over the next 10 years, US GDP will be around $32.99 trillion. You guess it, the math is (1.02^10) * $27.063 trillion = $32.99 trillion.
Finally, if the economy grows at a paltry 1.5% rate over that time frame, US output will be around $31.41 trillion. You guess it, the math is (1.02^10) * $27.063 trillion = $32.99 trillion.
While those are some gaudy looking numbers, even the worst-case scenario is $33 trillion, the problem is current projections have us with an accumulated debt of $53.3 trillion at the end of 2033.
Here are the debt to GDP ratios at the various levels of economic growth:
| 3.0% GDP Growth | 146.5% |
| 2.5% GDP Growth | 153.9% |
| 2.0% GDP Growth | 161.5% |
| 1.5% GDP Growth | 169.7% |
That got kind of ugly, didn’t it? There are no two ways about it. $53.3 trillion in accumulated debt is an enormous sum in both absolute and relative terms, and the US Treasury has to figure out a way to finance it. By the way, in case you were wondering, the Department of Defense, mandatory programs (Social Security being the largest of these) and servicing the national debt will constitute 88.5% of Federal expenditures in 2033.
So, there is a little more to meaningfully ‘cutting the deficit’ than scotching the National Endowment for the Arts, restricting funds for Planned Parenthood, getting rid of all foreign aid programs or even sending some munitions to Ukraine. It will require a willingness to reform and transform things like Social Security, Medicare, Medicaid and the Pentagon. Does anyone on Capitol Hill have that kind of nerve?
Just saying.
The $64,000 Question:
With all of this mind, let me ask you a question: Given what we have seen coming out of Washington in recent memory, culminating in this week’s mess, what will be the world’s appetite to finance our $53.3 trillion debt load? Even more, at what interest rate will it be? That, right there, is the $64,000 Question.
Will it be at the roughly 2.50 -2.75% rate the White House is currently projecting? This even as our debt to GDP ratio mushrooms? Remember, an increase in this ratio suggests a poor use of leverage. However, it has been a long time since anyone has accused the Congress of being a good steward of the country’s purse.
Hopefully, you can see where I am going with this. Will you be willing to finance the government’s $55.3 trillion debt load in 2033 at 2.5%, which is about where the White House thinks you will? Will you have that much faith in the Congress and whoever resides in 1600 Pennsylvania Avenue to loan them money for any extent of time for less than the historical rate of inflation?
If you are having trouble answering those questions, or if they are making you uncomfortable, as an American, imagine being a foreign investor. How do you process the events of this past week? The constant threats and theater of government shutdowns? The apparent unwillingness to address the real issues behind the country’s growing indebtedness?
Do you like what you see? Are you willing to lend us money at 2.5% Or even 3.0%.
To be sure, Europe and Japan are arguably in even worse shape than we are. Further, who knows what the future holds, right? Someone might step, as they always have in the past. Something might galvanize us, again, as Americans. There might be some new technology which spurs greater economic growth. All of it and more.
To be sure. It all could happen, and I hope it does.
In the meantime, we all need to remember, especially our officials in Washington, when you are as dependent on other people’s money, as we are, you better run a tighter ship and show some smarts. Either that, or be willing to pay a lot more to finance our profligacy.
It almost makes you wax nostalgic for 1981.
This is when the national debt crosses $1 trillion for the first time. I was 13, and I could see a movie for $2 and still get that frosty Sprite for 15 cents in Treadwell Sellers barber shop.
I wonder what kids today will remember fondly about 2023.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.