Debt and Deficits

28 April 2021 www.id-financial.com Paul K Doak, CFP?

Are Federal Debt and deficits too High? And what about inflation?

With recent COVID Relief bills in 2020 and early 2021 and now, in the US, we are contemplating another huge spending bill for Infrastructure, pegged around $2Trillion!!

It got me thinking- how can we afford this?

We need to think not of Debt to Revenue ( taxes collected ) but Debt to Gross Domestic Product.

Gross Domestic product is the total value of all good and services produced in a country for a period of time. Or the total Income that of the country.

We know as household that we may owe a total of $200,000.00 (car loan, mortgage, etc) and the gross domestic product of our household (income) is $100,000. The household Debt to Income is 200%.

That sounds high- and yet, we do not allocate all 100% of the income to the debt- we need to eat, travel, and pay other expenses.

In the US, our debt is about $26.70 Trillion and we have a GDP of about $21.43 Trillion -huge numbers but the ratio for 2020 comes out to about 107.6%

So, in comparison to the household example above, the US is low. Compared to other countries, the US has a high level of debt to GDP- ranked 6th out of the top 20 economies in the world.

The annual amount the US is receiving in taxes, (revenue) vs annual spending- that is the budget deficit. Most years, we spend more than we take in. We then borrow the difference from the Bond Market. That annual deficit is added to the total Debt.

It is easy to get terms confused, especially with politics involved. Think of deficit as a year to year -amount in vs. amount out. And Debt is the total amount owed to various US Government Bond owners.

Just like the household, would it be beneficial if they could allocate more to debt or increase their income and get the ratio lower? Yes. But not so much as it would cause hardship or hinder the ability for growth.

Infrastructure Bill-The US Government is currently debating both the amount to spend and the amount of taxes to raise with an eye to hopefully not increase the Debt to GDP ratio, maybe.

28 April 2021 www.id-financial.com Paul K Doak, CFP?

One thing that is hard to bake into the cost is the impact that the infrastructure spending will have-Historically, infrastructure investments improve the GDP.

Inflation-Government borrowing, up through the 1990s when deficits increased, then interest rates increased and caused inflation to increase and economic slow down followed. It was like clockwork. Then in 2009, the Economic Recovery Act which was about $787 Billion, was passed and the rates stayed low- no one expected that. Even legendary Bond Trader Bill Gross got it wrong.

And over the past 12 years or so, interest rates and inflation have remained low, even in the light of continued deficit spending and large bailout packages, like the CARES Act in response to COVID-19.

Could this be a new normal? Are the markets measuring total debt vs GDP more important than before for the US? Other factors may be at play, only time will tell.

Audio Sources: “Planet Money Podcast on NPR https://www.npr.org/podcasts/510289/planet-money

Written Sources:

Debt: Fiscal Data, US Treasury Department

GDP: US Bureau of Economic Analysis

Debt to GDP Ratios: Investopedia.com, tradingeconomics.com

Interest Rates: Federal Funds Rates macro trends.net

Inflation Rates: usinflationcalculator.com, thebalance.com, inflationdata.com

As well as articles found on The Federal Reserve, Forbes magazine and the Economist for articles I found related to the subject.