“We’re going to have a debt crisis in this country. How fast it transpires, I think, is going to be a function of that supply-demand issue, so I’m watching that very closely.” – Ray Dalio, Founder of Bridgewater Associates (September 28, 2023)
I can’t believe nobody is talking about this.
The US Congressional Budget Office (CBO) has quietly released a forecast to 2053 that essentially plots the path to America’s fiscal collapse. Of course, they don’t use those words but the data is clear.
The current budget deficit is an abnormally high 5.9% of GDP. This is when the economy is at full employment. Prior to the Global Financial Crisis of 2008, the budget deficit averaged closer to 1% of GDP and only reached 5% during the heat of recession.
The Abnormal Becomes Normal
Massive budget deficits are the new normal.
Going forward, the CBO is predicting ongoing 6% budget deficits, widening to 10.1% by 2044-2053! This equates to over $8 trillion of over spending each year. And that’s if all goes according to plan, which it never does.
The reason CBO’s estimates veer from reality is because its economic growth forecasts run in a straight line and don’t account for recessions or major shocks, which have historically expanded deficits by about 4 percentage points.
More recently, however, during the Global Financial Crisis and pandemic deficits expanded by closer to 10 percentage points. As economic crises grow larger over time, these expanded emergency deficits become the new norm.
In the past, deficits were offset by more constrained spending during economic booms. More recently, however, deficit spending has remained at abnormally high levels even during periods of strong growth.
America has developed a nasty habit of permanently large budget deficits – even in the best of times.
The rise of inflation and bond yields is a symptom of this profligacy. Given current trends, some are now predicting 13% 10 year US Treasury yields by 2030, based on current deficit predictions. This would be catastrophic for today’s overleveraged economy.
If the CBO’s estimates are taken at face value, this trend will worsen through to mid-century.
CBO’s budget deficit estimates are likely overly optimistic. Not only aren’t standard economic shocks not incorporated, the growing cost of the destruction of the biosphere isn’t even a consideration.
As climate disasters and emergencies accelerate through the 21st century, recovery spending will grow exponentially. The interconnected nature of the economy and unpredictability of climate disasters means we’re likely to see complex intertwined collapses of industries like real estate and finance, on top of destruction of supply chains, infrastructure and food supply. Rolling catastrophes will overwhelm government budgets by mid-century.
Event CBO’s relatively optimistic scenario forecasts a dire 10.1% budget deficit and 200% debt-to-GDP ratio by 2044-2053. In reality, it will be much worse.
In the past, America has been able to get away with extraordinary spending and deficits because the US dollar was the global reserve currency. But there are limits beyond which America cannot return. Indeed, foreign adversaries have already invested considerable effort forming alternatives to dollar hegemony, which is leading to a multi-polar world. Coupled with profligate overspending, America – and other countries experiencing the same issues – is increasingly vulnerable.
So why not cut spending to balance the budget?
What are you going to cut? Defense? Healthcare? Social Security?
At this point, the “cure” is as bad as the disease. Cutting and/or taxing will bring about the very outcome you were trying to avoid.
Whether you slash spending, hike taxes, inflate or simply do nothing and wait for a crisis the result is the same:
American standard of living is in terminal decline.