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TRENDLines Debt Meter: USA's Federal Debt will double by 2026

May 29, 2011 2:03 PM ET
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May 28 2011 delayed FreeVenue public release of Feb 25th guidance @ Trendlines MemberVenue ~ Annual Subscription ($5/month) required for access to the current charts & discussion

Debt Meter:  USA Structural Deficits Leading to Financial Crisis in 2022

After a decade of monitoring the issue, TrendLines Research began publishing alerts in early 2009 warning that the USA Federal Government is headed for an inevitable Investor Crisis with respect to its treasury auctions.  With concern over the integrity of sovereign debt, bond vigilantes are increasingly monitoring Deficit/GDP & National Debt/GDP ratios.  It appears the current Wall Street spotlight on European nations will be donned on American Treasury activities within eleven short years.

Measures within this year's Obama Budget are cause to push our alert back one year (from 2021) from the December update.  It was good news to see the Debt/GDP ratio does not surpass 100% over the three decade outlook.  And, the Deficit/GDP ratio is not scheduled to exceed 4.2% over the period.  This is commendable progress ... but not sustainable in the long run.  Final disposition of the extended Bush Tax Cuts in 2012 still provided potential fodder for the bond vigilantes.

Due to an increasingly corrupt electoral system, members of Congress and successive Presidents appear beholden to donors to their multi-million dollar fund-raising campaigns.  Add in immense lobbying activities to the fray and we see legislation catering to the social engineering agenda of the Progressive left and providing obscene levels of subsidies and favours to corporate and union sectors.  Partisanship has become polarizing to the point that some legislation efforts are seen to have become virtually dysfunctional.

Social Security is the problem's poster-child:  its annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, afterward by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay only 75% of scheduled benefits through 2084.

As a result, the Federal Gov't is on a path that would double today's $15-trillion National Debt by 2026 and triple it by 2036.  Most buyers of US Treasuries are unaware of these precise numbers, but they have had a sense for a while that America's fiscal well being is suffering from substantial mismanagement. 

Albeit the time line is open to subjective interpretation, foreign Investors are cognizant continued failure to address this behemoth will lead to:  (a) demands for increased interest rates on Treasury notes;  (b) select offerings in alternative currencies;  (c) rating downgrades;  (d) still higher yields ... perhaps 4% greater than today; & (e) ultimately the temporary shunning of Treasury Auctions by tier-1 buyers in an effort to stage an intervention.

In addition to the secular rise in yields demanded, another clue to the proximity of another and almost inevitable American financial crisis is the trend of the USDollar exchange rate.  Misgivings in the commitment of Congress & the Administration in addressing their Deficit/Debt responsibilities began in January 2002.  In succeeding years, the disfavoured currency plunged 46% from its USA:EUR rate of 1.16 to 0.63 in 2008.

The secular decline was interrupted in 2008 by safe haven seekers during Russia's incursion into Georgia & the Liquidity Crisis; but the trend resumed in March 2009.    Today the USD enjoys a rebound rate of 0.72, but a general downtrend will prevail.  Mass withdrawal of foreign (and some domestic) buyers of Treasuries will be known to be imminent upon deterioration of the USA:EUR exchange rate to new lows.

Left unimpeded, the rise in Debt interest, unfunded Social Security liabilities,  Entitlements for Medicare/Medicaid and Universal Health Care would drive the National Debt to $53 trillion over the next 30 years.  On the very short term, there is definite relief.

Although the 2011 $1.5 trillion Budget Deficit represents a scary 9.7% of GDP, our analysis of CBO costing of the current Obama ten-year Budget indicates the ratio will decline to "only" 3.1% ($533 billion) by 2014 as programs dealing with the liquidity crisis (TARP etc) and the Recession (fiscal stimulus) and the full Bush tax cuts expire.

This reprieve virtually guarantees the stability of Treasury sales to both domestic & international investors over the next 48 months ... a crisis in not imminent on the short or medium term.  But discussions surrounding the 2015-2025 Budgets will see very heated debate ... domestically and across the globe.  The Deficit/GDP ratio is scheduled to drift back to 3.8% in 2022 on a journey ultimately leading to 3.9% by 2040.  It will become common knowledge that no reprieves are apparent over those 25 years.  Somewhere along the way, Congress will be forced to acknowledge that the raising of new funds is having diminishing returns due to the realities of compounded higher interest rates.

As part of a diversionary tactic that started in February 2010, Wall Street & Cable News have been engaged in faux outrage at the prospect of Greece's 14% Deficit/GDP & 115% Debt/GDP ratios, accompanied by mucho finger-pointing at the other PIIGS.  Congress got away with its own extravagance this time 'cuz it was a sanctioned spike deemed necessary by the G-8 & G-20 to avert an economic Depression.  But the future episode will clearly be a child of structural Deficit budgeting.

With its 10-year horizon, the 2009 Pelosi-Reid-Obama Budget process shone a light on the whole structural deficit issue about which Trendlines Research has been raising awareness about for almost a decade.  The foundations cross several administrations.  Hopefully, closer Media & think-tank scrutiny will spawn anticipatory action by a more fiscally responsible Congress and/or President.  Hey, at least Barack Obama founded a bipartisan committee in March 2010 to suggest new paths!  Before the 30-yr bond is declared junk status, the President tasked the commission to recommend mitigation options.  In a July 28th hearing they revealed that by present projections, 1/4 of Social Security recipients must be dropped by 2037 to maintain the plan's integrity.  Consensus of submissions has been consistent with most agreeing a 60% Debt/GDP ratio should be sought by 2018-2022.

If resultant action is not forthcoming however, current CBO data indicates that left unchecked, the annual Deficit rockets to $2.2 trillion by 2040, $3.3 trillion by 2050 & $8.8 trillion by 2075.  Meanwhile, the National Debt surges to $81 trillion & $224 trillion respectively by the latter two dates.

Gratefully, this "would/could/might" scenario is only an academic exercise.  If Congress fails to address this issue responsibly, most of the foreign and even some domestic players will simply withdraw temporarily and shun the Treasury Auctions that fund "the habit".  The dark and ominous path illustrated in the chart will be truncated when these Investors sense the Federal Gov't is approaching tipping points where they deem it prudent to exit the venue.

Weighing fully the USA's situation, Trendlines Research judges such an investor intervention crisis will occur in 2022 ... upon the Deficit re-attaining 3.8% ($1 trillion) of GDP & the National Debt reaching 100% ($25 trillion) of GDP.  That's only eleven years away.  $850 billion will be required in 2022 to pay the interest.

The unholy alliance between Wall Street, Cable News (and possibly the White House) has been sly in diverting scrutiny away from itself by a smoke&mirrors campaign highlighting poor financial fundamentals in Argentina, Iceland, Dubai-UAE, Greece, Ireland,  Spain, Hungary, Portugal & Italy.  When they run out of countries, be assured the same scrutiny will be applied to the fiscal soundness of the USA.  Trendlines Research takes the position the spotlight is in fact already back on the USA by the savvy.

Originally, we projected new lows for the USDollar would occur just prior to the end of the decade.  But a more aggressive scenario (reflected via our Barrel Meter) forecasts an accelerated version of this crisis, with the USDollar plunging to new lows in 2012Q4 ... as players speculate on the prospects of a second term for Barack Obama.  A EURO spike of this magnitude would certainly act as a wake-up call for policy makers, bringing about immediate intervention strategies to initiate a prompt retreat.  I am confident the crisis won't last long and the Dollar will bounce back.

On the positive side, the string of USA Export records seen in 2006/2007 should resurface in mid 2011 as importers see nicer prices on American goods and services.  Manufacturing could also surprise when domestic consumers start to shun high priced foreign goods and associated ever increasing transportation costs of those products.  With a corrected trade surplus, crude oil back to $65/barrel (2014) and a bi-partisan agenda promoting fiscal responsibility, the USA will begin the long road back...






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