Sometime in the next 15-45 days, the United States government is going to run out of credit. This is the result of a law, passed in 1917, that placed a limit on what the country can borrow as described by law.
The United States is the only developed country in the world that limits the ability of the government to borrow. While some people see the limit as the problem, it is really the symptom. A combination of too low taxes and too high spending creates the deficits which must be financed.
Resolving the issue is simple on paper. It is almost politically impossible. In general, republicans want to reduce spending and lower taxes while democrats want to increase spending and raise taxes. However, due to the political blowback either idea would generate, neither side will put forth concrete proposals to do the same. Thus, the country goes through years of “continuing resolutions” in place of a voted budget, as no one wants to take responsibility for the deficits being generated by the status quo.
The evolving nature of government spending has also changed with demographics and time. At present, over two-thirds of the Federal Government’s expenditures are for Social Security and Medicare. Add Defense outlays and the amount goes to eighty percent. The balance is for things like disasters, making sure food and drugs are safe, packages weigh what they are supposed to, roads get paved, interest on debt and the like. The standard manta that there is enough “waste, fraud and abuse” in expenditures that can be reversed and balanced the budget is a myth.
The government’s efforts to make sure everyone pays their fair share of taxes have also come under criticism. Data was presented by the Internal Revenue Service that every dollar in increased tax enforcement would result in ten dollars of additional tax revenue. This elicited howls of protest from politicians that their constituents (i.e., larger donors) were having their constitutional rights violated. As if evading taxes is a constitutional right.
In fairness to the US, the trend of governments increasing their borrowings is an international phenomenon. Before comfort is taken in that fact, be reminded that should all countries cut back their borrowings at the same time, the adverse economic results will be magnified many times over.
In fact, there is a school of economics that considers an expansion of credit (borrowings) to be necessary for an economic expansion, and a contraction in credit necessary for a recession. “Contraction” can take several forms, from running surpluses to a collapse in collateral values and bankruptcies.
The consensus seems to be that the US will muddle through this as it has done before. Each time it happens, the value of the dollar as the world’s currency is eroded. No foreigner wants to hold debt in a country that will not pay. One of these days the ship of state will go over the waterfall with unknown implications.
The Economy
Economic activity has slowed but is still positive. Higher interest rates have affected capital spending in many areas but have not affected overall economic activity.
Most net job losses to date have been in the technology and white-collar sectors. While high in salaries, these positions are few in number. Blue collar and manufacturing jobs continue to be strong. Manufacturing seems brisk as domestic capacity seeks to replace less dependable offshore sources.
Inflation
Inflation continues above the two percent annual rate which the Federal Reserve terms intolerable. Wage gains seem to be a bit less of a factor. Price increases more than inputs have become more of an issue. Such price increases are usually eliminated by competition, but a weaker dollar makes foreign competitors less willing to contest price increases and more likely to match them.
Going forward, a contraction in the money supply along with the higher interest rates at present may be enough to stem inflation. If government spending is contained, so much the better.
The Stock Market
Stocks are having a problem in that a handful of names seem to be keeping the averages afloat. Apple, Microsoft, etc. are ahead for the year, while the average security is flat.
This narrowing of leaders is typically not a good sign for stock prices overall. Either leadership must change or stock indexes contract.
The ongoing political antics regarding the Federal deficit does not help matters. If government expenditures are curtailed, that will not help the economy. If taxes are raised, that will also not help, depending on how it is done and to what extent.
Programs like rebuilding the electric grid, providing for electric cars and the like are all plausible government objectives given the climate situation. The problem is that we may not have the funds to address them as currently conceived with the current tax structure.
Warren M. Barnett, CFA
May 10, 2023
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