10/30/19

US Deficits can become HUGE



$3 Trillion US Federal Deficits are coming.

The US Federal Budget deficit in 2019 was one trillion dollars. Three trillion dollar deficits are just a recession away.

Who cares, you might ask? Deficit Chicken Littles have been running scared for decades. The US economy continues to hum along with plentiful jobs, cheap gasoline, and great TV. The answer to who cares is that every one will care at some point.

The Red numbers are coming! The Red... 

What's amazing is that our $1 Trillion deficit comes with no large-scale war, very low debt service cost, and no recession.  

In good times like 2019, the US government should save money for a rainy day. Instead we have near record deficits by almost every measure. $1 trillion deficit, 5% of GDP and 30% of government revenues. We are spending when we should be saving. 

This article creates 3 alternative scenarios, labeled "average", "recession," and "depression" using the historical data. 

US Overspending is large and obvious

Ernest Rutherford, the Nobel Prize winning physicist, said, if you need statistics to understand your data, you should have done a better experiment. Similarly, economic truths do no require complicated math. Here is our overspending situation. 
  • We have one of the strongest labor markets in history. 
  • The US has a massive debt, yet pays almost no interest.
  • US military spending is near historical lows. 
  • Deficit near record highs.

Big Party, No Savings

The economy is super strong, we are financing our debts at very low interest rates, and we are investing very little into our military. This is a time where we should be running a HUGE budget surplus saving up for higher interest rates, a war, or a recession. 

Scenario #1: Return to Average

The average scenario returns the military spending and interest expenditures back to post World War II averages for the US. 


Scenario #2: Recession

The recession scenario adjusts the military spending and interest expenditures to the middle of the bottom half of the historical range (75th percentile). It also reduces government revenues in line with historical data for moderate recessions. 

Scenario #3: Depression 

The depression scenario uses the highest post WWII interest rate, the highest post WWII military spending, and the 1930's depression figure for the decease in revenue.

Results and comment

US Deficit interest rate military /GDP revenue loss
2019 $1 Trillion 1.73% 3.26% 0%
Average $2 Trillion 3.15% 4.91% -9%
Recession $6 Trillion 4.53% 7.26% -18%
Depression $6 Trillion 7.45% 13.57% -52%

Is $6 trillion the worst case? No. Records are made to be broken. 

Why should we care? At some point, financial markets will cut the US off from more borrowing. The result will be a debt crises and a depression. 


Interest rate = (net interest)/(total debt outstanding) - average interest rate paid on US debt.

2 comments :

  1. When do you think the "crunch" will come?

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    Replies
    1. I don't know when the crunch will come. Japan has lived with very large debt and deficit for many, many years and still have zero or negative interest rates.

      For me, I have learned that I cannot buy risky assets even though they seem likely to rise in price for some more time. Because I believe a bad outcome will occur, it makes me a weak hand if I hold stocks or other risk assets. I have been bullish on stocks for a bit here, but have not owned any because I know I would sell at any moment of decline.

      The end is coming at an unknown time. Other people may be able to make money from rising stocks between now and that end.

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