The role of the United States Secretary of Treasury, Steven Mnuchin, seems almost enviable. He issues checks that cover the nation’s debts, yet intriguingly, these checks clear without issue. Despite the nation’s technical insolvency, the mechanism behind this seems mystifying to many, though Mnuchin undoubtedly has a firm grasp of how the system operates.
Mnuchin’s wife, Louise Linton, expresses admiration for him, noting his deep understanding of the economy. Likewise, Mnuchin appreciates Linton, a Scottish actress, for her whimsical enthusiasm for trends such as SoulCycle Snapchat filters that make users resemble puppies or piglets. It’s amusing to think how such peculiar fads may relate to broader economic themes, even if they escape our understanding.
While we lack expertise in Snapchat trends, we remain keenly aware of the straightforward arithmetic at play. We’re particularly concerned about the precarious situation that the 115th U.S. Congress is creating for the American public. It appears that an impending fiscal disaster is looming closer than Mnuchin might acknowledge.
Grim Particulars
Federal debt has soared uncontrollably over the decades. Commonly, the proposed solution to this debt crisis is for the economy to experience growth that offsets the increasing debt. However, this scenario has not yet materialized, despite a plethora of policies that seem to prioritize borrowing against future earnings to fuel current expenditures.
The reality is stark: you cannot grow out of debt if the debt is escalating at a faster rate than the nation’s Gross Domestic Product (GDP). For instance, in 2000, the federal debt stood at approximately $5.6 trillion while real U.S. GDP hovered around $12.5 trillion. Fast forward to today, and the federal debt exceeds $20.6 trillion, with real GDP only reaching about $17 trillion.
In merely 18 years, federal debt has risen by over 265%, in sharp contrast to the 36% increase in real GDP. This trend illustrates a clear divergence, showcasing an economy that is not on a path to alleviate its debts.
Rather than reining in spending to achieve a balanced budget or aligning debt growth more closely with GDP growth, the federal government continues to amplify its missteps. Steven Rattner, a former Treasury Secretary adviser who played a pivotal role in the 2009 U.S. auto industry bailout, sheds light on the troubling forecasts:
“As of June 2017, the Congressional Budget Office projected that the federal budget deficit for the following year would reach $689 billion—already higher than it should be in this phase of economic recovery. Following the enactment of the tax cut and new spending bill, this anticipated deficit surged to $1.15 trillion. That figure is nearly on par with the deficit recorded by President Obama during the financial crisis.
“Even more concerning is the expectation that the deficit will continue to rise. By 2027, projections from the Committee for a Responsible Federal Budget indicate that the annual deficit could hit $2.1 trillion. Such deficits are set to inflate the nation’s total debt from the current $20 trillion to as much as $35 trillion.”
When Budget Deficits Will Really Go Vertical
After President Trump signed the GOP tax reform bill on December 22, the yield on the 10-Year Treasury note was 2.48%. By the end of the market day the following Thursday, this yield had climbed to 2.89%. In under two months, the government’s borrowing costs surged by over 16%.
In a similar vein, the rate for a 30-year fixed residential mortgage has also escalated—from 4.14% to 4.51%, marking an approximate 9% rise. This uptick may help cool down the housing bubble and has likely influenced the decline in weekly mortgage applications.
Characteristic of the later stages of the business cycle, rising interest rates, increasing price inflation, and growing trade deficits begin to emerge. Presently, consumer prices, as noted by the consumer price index, are climbing at an annual rate of 2.1%.
Trade deficits are also escalating. Observing from Long Beach, near the busy Port of Long Beach/Port of Los Angeles complex, we notice a considerable amount of activity.
In 2017, the Port of Los Angeles handled 9.34 million twenty-foot equivalent units (TEUs), marking the highest volume in its 110-year history. Likewise, the Port of Long Beach recorded 7.54 million TEUs in 2017—a new record in its 107-year history.
This year has continued the trend of increased activity, with the Port of Long Beach reporting 657,830 TEUs in January—an impressive nearly 13% rise compared to January 2017. The scale of this trade is certainly noteworthy.
Container vessels laden with goods from countries like China, Hong Kong, Japan, South Korea, Taiwan, and Vietnam line up in San Pedro Bay, awaiting their turn for docking. Skilled longshore workers efficiently transfer containers to trucks and rail systems, filling the ships with U.S. currency for their return to Asia.
As of December, the U.S. trade deficit expanded to $53.1 billion, the highest it’s been since October 2008, just a month after the collapse of Lehman Brothers.
Although an immediate decline in the U.S. trade deficit doesn’t seem forthcoming, tightening credit markets, fueled by rising consumer prices, will necessitate a response. It’s likely that a slowdown in economic activity is on the horizon, at which point we may witness budget deficits skyrocket.
Wishing you a prosperous Lunar New Year!
Sincerely,
MN Gordon
for Economic Prism
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