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Weekend Reading: #MAMI – Make America More Indebted

By Michael Lebowitz | June 29, 2018
, Weekend Reading: #MAMI – Make America More Indebted

, Weekend Reading: #MAMI – Make America More Indebted

I have spilled a lot of digital ink over the last few years on the trajectory of debt, spending and the impact of fiscal irresponsibility. Most of it has fallen on “deaf ears” particularly in the rush to pass “tax reform” without underlying fiscal restraints. To wit:

“The recently approved budget was an anathema to any fiscally conservative policy. As the Committee for a Responsible Federal Budget stated:

‘Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance.

Passing fiscally irresponsible budgets just for the sake of passing “tax cuts,” is, well, irresponsible. Once again, elected leaders have not listened to, or learned, what their constituents are asking for which is simply adherence to the Constitution and fiscal restraint.’

I then followed this up this past Monday with “3 Myths Of Tax Cuts” stating:

‘Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform.

As the chart below shows there is ZERO evidence that tax cuts lead to stronger sustained rates of economic growth. The chart compares the highest tax rate levels to 5-year average GDP growth. Since Reagan passed tax reform, average economic growth rates have only gone in one direction.'”

, Weekend Reading: #MAMI – Make America More Indebted

The reason for the history lesson is the CBO (Congressional Budget Office) has just released a new report confirming exactly what we have been saying for the last two years.

“In CBO’s projections, the federal budget deficit, relative to the size of the economy, grows substantially over the next several years, stabilizes for a few years, and then grows again over the rest of the 30-year period, leading to federal debt held by the public that would approach 100 percent of gross domestic product (GDP) by the end of the next decade and 152 percent by 2048. Moreover, if lawmakers changed current laws to maintain certain policies now in place—preventing a significant increase in individual income taxes in 2026, for example—the result would be even larger increases in debt.

The federal government’s net interest costs are projected to climb sharply as interest rates rise from their currently low levels and as debt accumulates. Such spending would about equal spending for Social Security, currently the largest federal program, by the end of the projection period.”

, Weekend Reading: #MAMI – Make America More Indebted

My friends at the Committee for a Responsible Federal Budget summed up the issues well.

  • Debt Is Rising Unsustainably
  • Spending Is Growing Faster Than Revenue
  • Recent Legislation Will Substantially Worsen the Long-Term Outlook if Extended. 
  • High And Rising Debt Will Have Adverse and Potentially Dangerous Consequences (Will lead to another financial crisis.)
  • Major Trust Funds Are Headed Toward Insolvency. 
  • Fixing the Debt Will Get Harder the Longer Policymakers Wait. 

While the CRFB suggests that lawmakers need to work together to address this bleak fiscal picture now so problems do not compound any further, there is little hope that such will actually be the case given the deep partisanship currently running the country.

As I have stated before, choices will have to be made either by choice or force. The CRFB agrees with my assessment.

“CBO continues to remind us what we’ve known for a while and seem to be ignoring: the federal budget is on an unsustainable course, particularly over the long term. If policymakers make the tough decisions nowrather than wait until there’s a crisis point for action – the solutions will be fairer and less painful.”

I am not hopeful. With government dependency at record levels as a percentage of disposable incomes (22.05%), the outlook for the economy will continue to become less bright as Government transfer payments only offset a small fraction of the increase in pre-tax inequality.

, Weekend Reading: #MAMI – Make America More Indebted

These payments fail to bridge the gap for the bottom 50% because they go mostly to the middle class and the elderly. With wage growth virtually stagnant over the last 20-years, the average American is still living well beyond their means which explains the continued rise in debt levels. The reality is that economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service.

The “structural shift” is quite apparent as burdensome debt levels prohibit the productive investment necessary to fuel higher rates of production, employment, wage growth, and consumption. Many will look back at this point in the future and wonder why governments failed to use such artificially low-interest rates and excessive liquidity to support the deleveraging process, fund productive investments, refinance government debts, and restructure unfunded social welfare systems.

Instead, those in charge continue to “Make America More Indebted.”

As individuals, we must realize we can only depend on ourselves for our financial security and work to ensure our own fiscal solvency.

As my father used to preach:

“Hope for the best, prepare for the worst, and remember the best rescue is a self-rescue.” 

Be hopeful. Just don’t be dependent.

Just something to think about as you catch up on your weekend reading list.

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“ Wall Street is a street with a river at one end and a graveyard at the other.” – Fred Schwed, Jr.

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Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research. 

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