A New Way to Analyze Government Debt

Jun 22, 2023 | Bubble Monitor, No Bull Economics

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It has finally dawned on the market that the Fed plans more interest rate hikes, like Powell has been saying all along, thus pushing down stock prices while inflating yields. While this realization has helped stabilize the US$, it has badly pressured commodity prices during the week ended 6/22/23. Seems like all this volatility would push the VIX fear gauge through the roof, but just the opposite is true… In any case, market participants should be carefully considering the impact of higher rates on a government debt load set to balloon to $46 trillion by 2033 as outlined below.

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Government Spending Analysis

The traditional way to assess a government’s leverage level is to calculate debt/GDP. We propose a new leverage ratio, government debt/household wealth to further assess the effectiveness of government spending.

  • The rationale for the use of a government debt/GDP leverage ratio is to assess how effective government spending is in relationship to driving economic growth. If the GDP is growing faster than government debt, the government is doing a good job as a financial steward of the economy.
  • According to recent CBO projections, the federal government will increase its debt to $46 trillion by 2033 at which time the government debt/GDP ratio will increase to 118%, up from the 47% average from 1973 – 2022. So, it is fair to say that the CBO does not expect all this new government spending will drive economic growth & associated tax receipts.
Government Budget Outlook by Fiscal Year

Source: The Budget and Economic Outlook: 2023 to 2033 | Congressional Budget Office (cbo.gov)

  • How is the government doing in terms of driving household wealth?
  • Currently, government debt of ~$26 trillion represents roughly 18% of household wealth & if the government plans to increase its debt to $46 trillion by 2033, household wealth will have to increase from $141 trillion currently to $256 trillion by 2033 to keep the ratio constant.
  • Certainly, there would not be a household in the country that would be upset about $46 trillion in government debt by 2033 if the government was able to drive that type of wealth creation between now & then!
Wealth by Generation Graph

Source: The Fed – Distribution: Distribution of Household Wealth in the U.S. since 1989 (federalreserve.gov)

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