A key determinant of the growth of wealth for Americans over the next decade is likely to be the federal debt. On January 28th, the non-partisan Congressional Budget Office released its annual 10-year forecast of the debt. Here's what the CBO said along with five observations adding context to understand this risk to U.S. investors.
1. This frightening long-term projection by the CBO is very unlikely to be the course of the federal debt in the future. We're at the beginning of the explosion in the federal debt and it becomes unsustainable in the years just ahead. The long-term debt accelerates annually because of federal deficits in this CBO projection of a budget deficit in 2018 of 3.8% rising to 4.4% annually in 2029, resulting in the stratospherically-soaring forecast through 2047. This scary picture assumes nothing is going to be done about it in the years just ahead.
2. The debt problem is not so hard to solve if you look at the math. The scary soaring debt is not inevitable; it's not even hard to avoid! Independent economist Fritz Meyer, whose research we license to share with you, says the optimal annual federal spending deficit is 2.9%, which is not so much lower than the scary soaring projection rising from 3.8% in 2018 to 4.4% in 2029. To be clear, any combination of spending cuts or tax hikes that lowers the annual budget deficit to 2.9% of gross domestic product annually for the long run solves the problem of funding Medicare, Medicaid and Social Security. Budget deficits equal to 2.9% of GDP would result in no increase in debt as a percentage of GDP.
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