Debt, Deficits, and Decay

The Wall Street Journal recently pointed out that the US government expects it will spend more in 2020 on interest payments on the government’s debt than it will on Medicaid. The Congressional Budget Office estimates interest payments will surpass national defense spending by 2023 and will be larger than all non-defense discretionary programs combined by 2025.1

Although investors believe it to be a recent issue, few have noticed that the US economy’s secular growth rate has been hindered by a debt overhang for nearly 40 years! Politicians from both parties have repeatedly tried to fend off the secular slowdown in growth by, ironically, adding more debt.

Investors need to be cognizant of the insidious issues relating to debt and deficits that tend to elude political discussions:

1. The debt problem has been growing for roughly 40 years.

2. Not unlike one who foolishly uses home equity to fund a vacation, the Federal government has created a significant asset/liability mismatch by using longer-term liabilities to fund short-term assets.

3. Increasing debt payments have been a major reason that US economic growth has secularly slowed. Debt payments divert the economy’s cash flow away from productive investment.

4. Despite repeated rhetoric to the contrary, politicians continuously try to correct slowing growth by issuing additional debt.

5. The government might have missed an opportunity to “term out” the debt. If Argentina, a marginal credit at best, could issue a 100-year bond, why couldn’t the US? Even low inflation compounded over a long enough period can significantly reduce the burden of repaying debt.

6. The US’s decaying infrastructure is undoubtedly hindering productivity growth and the overall standard of living. Funding badly needed US infrastructure may take some creativity.

7. There is always a business cycle, but investors should not expect US economic growth to secularly improve until we manage the government’s asset/liability mismatch.