Investors: Don’t Look Now But The National Debt Could Be $23 Trillion By 2021
Martin Hutchinson: There was a lot of back-patting in Washington this week after U.S. President Barack Obama signed a debt-ceiling deal that he and members of Congress claim will reduce the national debt.
But here’s the truth: This deal does nothing to reduce America’s debt burden. In fact, the $14 trillion we owe now could every easily exceed $23 trillion by 2021.
That’s a 62% increase.
It only takes a little bit of number crunching to see what I mean.
The deal brokered by Congress cuts spending by just $917 billion over a 10-year period, with a special congressional committee assigned to find another $1.5 trillion in deficit savings by late November.
Even if you round up, that $2.5 trillion in “savings” over a 10-year period is inconsequential when you consider that President Obama added nearly $4 trillion to the national debt in just a few short years in office.
How can you make any progress on the debt front when you’re adding $4 billion in new liabilities every day?
And the story is even worse than that: According to the Congressional Budget Office (CBO), even the $2.5 trillion the government claims to be saving is quickly vaporized by inflation and lost economic output.
CBO: Contrary to Barack Obama
The CBO in January estimated that a 0.1% reduction in growth rates would increase the deficit by $310 billion over the next 10 years, while a 1% increase in inflation rate would increase the deficit by $867 billion.
The CBO projects the average growth rate from 2011 to 2016 will be 3.25%, and the non-partisan group has the average rate of inflation pegged at 1.55% over that same period.
However, growth in the first half of 2011was 0.8% and the personal consumption expenditures (PCE) inflation index – the type of inflation the CBO looks at – was 3.5%.
So let’s do the math.
If growth and inflation statistics magically revert to CBO expectations – which would be a long shot considering how much they’re already off – then the budget deficit over the next 10 years would rise by $928 billion. That alone is more than enough to wipe out the $917 billion of initial savings in the debt-ceiling bill.
Worse, if the U.S. economy’s malaise continues to 2013, with lower growth and higher inflation than the CBO projects, then the deficit in 2012-21 will increase by $2.784 trillion.
You may argue that over three years the economy ought to do better than 0.8% growth. But with recent reports underscoring how much the economy has weakened in the past few months, I wouldn’t gamble on a stronger recovery taking hold. And given the actions of the administration and the U.S. Federal Reserve over the past couple years, I’m fairly confident that we’ll see inflation in excess of 3.5% during that same period.
If we’re really out of luck, and 2011′s first half represents a new long-term reality, then the deficit runs completely out of control.
Theoretically, it would surge by $9.17 trillion from 2012-21. But in practice, debt would spiral, the U.S. credit rating would go to hell, and an economic collapse would be inevitable.
Still, even that gloomy scenario doesn’t account for a possible increase in interest rates.
What would that look like?
Well, the CBO says a 1% increase in average interest rates over the next decade would add another $1.3 trillion to the 10-year deficit.
Of course, there is a solution to all this, but it involves a lot of bitter medicine. We’re talking about much higher interest rates, meaningful spending cuts and the closure of every available tax loophole. No more ethanol subsidies, no more mortgage interest tax deduction, and no more charitable deductions.
At this point, even this solution – unlikely as it is – would have to wait until 2013 at the earliest.
So the message is clear for investors: Invest in emerging Asia and the better-run countries of Latin America, and keep a decent chunk of your money in gold.
You’re going to need it.
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Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.