Monday, March 27, 2023

Jerome Powell and the Sustainability of America's Debt

In a recent meeting of the Senate Banking Committee, some comments from Federal Reserve Chair Jerome Powell should give us pause to ponder America's fiscal future.  Let's start with his response to a question from Senator Cynthia Lummis and then look at some background data showing the seriousness of the issue.


At the 1 hour and 52 minute mark, we find this exchange:


Lummis (R- Wyoming):  Thank you very much Madam Chairman and welcome Chairman Powell.  When you are setting these rates and making these deacons and seeking that 2 percent magic number (the Fed's inflation target), are you considering the cost of borrowing for the United States knowing that Congress has over-borrowed and that we have over-spent and that the national debt is now at least 97 percent of GDP and that we are going to face challenges of our own making?  This is not about what the Fed has done, this is about what the Congress has done that you have to factor into your decisions.  Do you think about the cost of borrowing for the United States itself?


Powell:  No we do not and we're not going to.  In other words, that would  be fiscal dominance.  If we were, you know, constrained in our monetary policy by the budgetary situation of the United States and we're not, we're clearly not, the path we're on is not sustainable but the level of debt that we have is not sustainable, put it that way.  We don't think about interest costs when we make monetary policy.  We think about maximum employment and price stability.


Lummis: It's your opinion that the level of debt that we have is sustainable?


Powell:  Yes.  Clearly, we have the largest economy in the world.  We can service this debt.  That's not the problem.  The problem is that we are on a path where the debt is growing substantially faster than the economy.  And that's kind of, by definition, in the long-run, unsustainable.  And the way countries have gotten or have fixed that is with longer term programs that have bipartisan support and that address the actual problem in the budget.  That is really the formula.


Actually, to correct Senator Lummis, America's federal debt-to-GDP was 120 percent in Q3 2022 as shown here:



Let's look at some background data.  Here is a graphic showing the United States federal debt which hit $31.419 trillion at the end of the fourth quarter 2022:



According to Debt-to-the Penny, the debt is now $31.458 trillion effective March 22, 2023.


While we are discussing debt and as additional background, here is a graphic showing the total debt of the United States including consumer, corporate and government debt:


Now, let's go back to America's federal government debt.  Here is a graphic showing the mounting interest payments on just the federal debt:


Interest payments on the federal debt have risen from $591.636 billion in Q2 2019 to $852.599 billion in Q4 2022, an increase of $260.963 billion or 44.1 percent.  These are tax dollars that could certainly be used to deliver much needed programs for American taxpayers.  In fact, according to the 2024 Fiscal Year Presidential Budget, the $852 billion would more than cover the budget for Medicare.  It is also important to note that this budget is projected to add another $17.054 trillion to the federal debt over the next decade as shown here:

Now, since politicians are famous for using the debt-to-GDP statistic, stating that thanks to more-or -less endless economic growth, the nominal level of the federal debt is meaningless, let's look at a graphic showing the total federal debt of the United States in blue versus GDP in red:



You will observe that for most of the past 50 years, nominal GDP exceeded the level of federal debt, became more or less equal over the period from the end of 2011 to the middle of 2019 but since then, GDP growth has been exceeded by federal debt growth, a trend that is most definitely not healthy as it will lead to higher and higher debt-to-GDP levels.


If we look at total debt of the United States and compare it to GDP, you'll see that the trend is even more worrisome:


The growth in total debt in the United States is accelerating at a far faster rate than growth in the economy.


If you want to see why the problem worsened, here is your answer:


The prolonged periods of near zero interest rates between 2009 and 2016 and again from 2020 to 2022 led to a massive expansion in personal, corporate and government debt as consumers, corporate leaders and politicians were lulled into a false sense of interest rate reality.


While Jerome Powell may believe that the strength of the United States economy will allow the nation to continue to service growing levels of its multi-sector debt, he does admit that economic growth is not keeping up with the growth in debt, an unsustainable scenario over the long-run.  What he doesn't mention is that it is largely the Federal Reserve's loose monetary policy since the Great Recession that has been responsible for the unfettered growth in debt.


But, then again, when did the braintrust at the Federal Reserve ever see the negative repercussions of their meddling ways and when did politicians ever experience the downside of their overspending ways?

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