#166: Government Needs to Tighten its Belt

S2N Spotlight

Let me start with some shock value. Interest payments on federal debt have passed $1 trillion as of September. If you want to do a back-of-the-envelope calculation, there is more than $35 trillion in debt. Let us be generous and say, at an average of 4%, that is a huge $1.36 trillion a year.

Ok so the counter is that income from tax receipts has grown as well. That is true, but not at the same pace. Look at the amount of revenue the government is spending on interest—35%. This is a 27 year high and tracking above its long-term average.

It has been 23 years since the government balanced its budget. We are sitting with an annual deficit of $1.3 trillion with a new president about to be inaugurated; don’t expect this number to narrow. I see it only growing.

S2N Observations

Yesterday I spotlighted the current length of the expansion. I played around with the data and came up with this visualisation, which I think gives you a clear picture of the difference in the dynamic of expansion versus contraction. Growth is more gradual and lengthy. Contractions are short and sharp. You can also see how since the Second World War the length of expansions has grown and contractions shortened. Central banks and government treasuries have been actively trying to engineer the business cycle. Libertarian economists (I confess) have been crying foul for more than a century, but the great experiment has proven us wrong over the short term (maybe not so short).

After all, it was Keynes who said, “In the long run, we are all dead” in his 1923 work A Tract on Monetary Reform. He was criticising the idea that markets would always self-correct in the long run. I still believe you cannot fight the forces that drive an economy; the free market will eventually self-correct. However, it is certainly dangerous to fall in love with a long-run theory in a world where a retail trader has access to tick data and television and the internet have something to say with or without news.

It is worth mentioning that China cut interest rates yesterday.

With all the deficits and interest expense talk, its no wonder the 10-year yield shot up to 4.18% and 30-year mortgage rates are up to 6.8%. I have a feeling inflation ain’t going away quietly.