"July's Soaring Deficit: A Red Flag for a Looming Economic Crisis"
William Griffo
Financial Services@ Option Pit, LLC | Wealth Building, Fixed Income, Equities
July Budget Deficit 2nd Highest in History is A Crisis in the Making
The federal budget deficit has long been a point of contention in U.S. economic policy, but recent trends suggest that the nation is teetering on the brink of a financial crisis with potentially devastating consequences.
July Budget deficit was the second highest in history (the first was Covid see below) … Meanwhile the economy has still not even fallen into recession yet!
Recession can force the deficit much wider than it’s current 7% of GDP level. ?
Take a look at the Fed graph below illustrating the trend to a larger budget deficit to GDP since the internet bubble burst in 2000.
?Federal Budget Deficit/GDP with Total Publicly Held Debt
Notice in the above chart how recession (Grey areas) ?is triggered as the deficit as a percentage of GDP becomes more negative. The more negative that ratio the more debt the government needs to issue to balance it.
Also notice how fast the Debt issuance (Red Line) increases as a result … This is because more debt (new dollars) must be created to balance the budget.
Wouldn’t it be great if we all had a US Dollar printing press!
Unfortunately, we don’t and to make matters worse when the situation gets bad enough they raise taxes on the hard working Americans to help balance THEIR budget.
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The United States is facing a stark choice:
·???????? either plunge into a depression or
·???????? endure high inflation while holding down interest rates, a strategy reminiscent of the economic policies of the 1940s.
However, this time around, the stakes are even higher, with the global economy hanging in the balance.
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The Debt Crisis: A Ticking Time Bomb
As of 2024, the U.S. federal debt has soared to an alarming:
These figures are not just numbers on a page; they represent a precarious situation where the nation's economic stability is increasingly vulnerable to external shocks.
The only factor that has kept the U.S. from descending into a full-blown debt crisis has been the very inflation that many of the talking heads (media) have recently celebrated as being under control.
However, this "victory" over inflation may be more of a warning sign than a triumph …
Because the math tell us: ?If U.S. nominal growth ("GDP") gets too close to U.S. interest rates ("Fed Target Rate"), there is a high probability of a sovereign debt crisis — a scenario that the Bank for International Settlements (BIS) warned about in June.
Numbers Never Lie ..
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Inflation: Unfortunately, is the ONLY Answer
Inflation, while often seen as the destroyer of Americans wealth, has played a critical role in keeping the U.S. fiscal situation from spiraling out of control …
This because inflation causes interest rates to rise, which is great for the baby boomer (ages 60+) generation … Why?
Boomers are holders of a massive amount of Government bonds, in their investment portfolio. ?The investment returns of the boomers and top 10% wealthy in general are why the economy has avoided recession for much longer than expected.
Understanding the dynamic, although contradictory, is helpful to see why lower inflation may be bad for the financial system and the economy.
A decline in inflation, may then reverse the income picture for boomers and turn them into sellers of Gov’t bonds …
This could quickly turn into a situation where the government is forced to create higher inflation to avoid a collapse in the bond market leading to a possible debt crisis.
The Impact of Policy Choices
The U.S. government's policy choices in the coming years will be crucial in determining whether the nation can avoid a debt crisis.
So, while financial markets currently perceive a low risk of Government finance stress, confidence could quickly crumble if economic momentum weakens, leading to a rapid escalation of the crisis.
Cutting government spending to avoid a worsening budget deficit is not realistic due to the green transition and political necessity to resurrect US manufacturing to create “real” growth …
Plus, no politician will support any cuts in entitlement including Pensions, Healthcare, and Defense so inflation is the only plausible solution.
The Stock Market's Role
Compounding the issue is the critical relationship between the U.S. stock market and the economy.
U.S. stocks effectively back the bond market, with a significant portion of American’s wealth and, by extension, GDP, tied to stock market performance.
If stock prices do not rise sufficiently each year, it could trigger a debt spiral where declining receipts (Taxes) and increased bond issuance exacerbate the deficit, leading to further economic instability.
Conclusion: A Perilous Path Forward
The U.S. is on a dangerous path, where as shown above, the only options seem to be a devastating depression, or a period of high inflation coupled with suppressed interest rates.
The decline in inflation, rather than being a sign of stability, may well be a precursor to a much larger crisis.
As the exploding debt train hurtles towards an uncertain future, we must hope our fearless leaders will take the necessary steps to avert disaster.
A weaker dollar will ultimately be one step in the right direct … So, as investors hold what is perceived to be “riskless” securities it would be prudent to moving a sizable chunk of that portion in your portfolio to Silver, Cooper, and Gold, plus Industrial Stocks (think PAVE & GRID) and very short-term (1-2yr bonds) to truly be hedged from the inevitable conclusion.
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Live and Invest With Passion My Friends,
Bill Griffo
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