You know the government deficits are eye popping when even a Washington Post writer is getting fidgety about it. Of course deficits only matter when it’s a president from your opposition party in office.
Writing for Real Clear Politics, Robert Samuelson of the Washington Post Writers Group analyzes the recent Congressional Budget Office report predicting that annual deficits will top $1 trillion a year from 2019 through 2028, an outlook that brought a “giant yawn” among Washington politicians.
These deficits will average about 5 percent of the U.S. annual GDP, a dubious feat only duplicated in six years since 1950, mostly following recessions when economic growth was feeble and unemployment aid was high. By comparison, the predicted 5 percent GDP match in the years ahead comes at a time of a growing economy with low unemployment. Politicians are simply cashing in on prosperity.
Samuelson speculates on something Jerry has often cited: government cost projections almost always…OK, always underestimate the final cost. Thus, Samuels says:
“Even the CBO figures may be optimistic if they’re based on unrealistic assumptions. Defense spending as a share of GDP is projected to fall; in a dangerous world, that may not happen. Similarly, some personal tax cuts are scheduled to expire at the end of 2025; many observers think Congress will extend them. Adding these amounts to government borrowing would increase the federal debt — the total of all past deficits — to more than 100 percent of GDP, about as large as right after World War II.”
Based on past experience, Samuelson is right. The deficits will almost certainly be higher than these projections.
Samuelson then gets to the heart of the matter, why Congress is raising deficits ever upward: they are buying votes.
“There can no longer be any pretense that the deficits reflect the aftermath of the Great Recession or other temporary forces. The main cause is political expediency: It’s more popular to increase spending and cut taxes than the opposite. Combined with an aging population, which automatically raises Social Security and Medicare spending, the profligacy becomes self-fulfilling.”
Pick your economic poison
Samuelson presents three ways a debt crisis could be forced upon the nation: rising interest rates that increases cost on consumers and business and ratchets the government debt even higher; inability to cope with a large national emergency because of a shortage of tax funds and available credit; major government spending cuts.
The last item will never happen. Politicians know that cutting programs means getting voted out of office, which is political suicide. There is a fourth possibility that isn’t mentioned: the government and the Federal Reserve inflate the currency and pay down government debt holders with inflated, worthless dollars. This is the most likely option, in our opinion.
The spark has been lit
In his book, “From Boom to Bust and Beyond”, Jerry explained why the long term boom from Reagan through George W. Bush that began winding down around 2007, followed by an “ice” phase of deflation, followed by a “fire” phase of inflation. We are now on the cusp of that fire phase.
On his radio show Jerry quoted Ernest Hemmingway when he said “how people go bankrupt gradually, then suddenly.” What that means is that irresponsible behavior runs up debt over many years gradually. Then, suddenly, insolvency brings a day of reckoning and it all comes crashing down at once. The article by Samuelson ends on that very note:
“On this, the conservatives and liberals probably agree. Say the conservative economists: ‘There is no current evidence … that a crisis is on the horizon. But a debt crisis does not come slowly and visibly like a rising tide. It comes without warning, like an earthquake, as short-term bondholders attempt to escape the fiscal carnage.’ We have been forewarned.”
Where to find resources
Jerry has made dramatic changes to the Smart Money Investor Training materials presented each month. He has moved the graphs and charts about the markets to the front of the session, and afterwards he incorporates material from the very prescient book, “The Fourth Turning”. Written almost twenty years ago, it is uncanny in how it has predicted where we are as a nation and what lies ahead.
Jerry has discussed many of these issues recently on his radio show, Jerry Tuma’s Smart Money Radio. Listen to recent episodes here.