Analyst Research

Fuzzynomics – U.S. Debt Forecast

January 21, 2019

Fuzzynomics – U.S. Debt Forecast

U.S. DEBT – I thought it was a worry…. but look at the calculations at the end of the article…

Total U.S. debt is about $21.9 trillion, of which $16 trillion is owed by the public. The sustained annual U.S. deficit is now believed to be more than $1 trillion.

In part because of continued rate increases under Powell, the interest cost on that debt could start to become a bigger and bigger burden.

Fed’s Powell says he’s very worried about amount of US debt
Thomas Franck | @tomwfranck | January 10, 2019

Federal Reserve Chairman Jerome Powell is concerned about the ballooning amount of United States debt. “I’m very worried about it,” Powell said at The Economic Club of Washington, D.C. “From the Fed’s standpoint, we’re really looking at a business cycle length: that’s our frame of reference. The long-run fiscal, non-sustainability of the U.S. federal government isn’t really something that plays into the medium term that is relevant for our policy decisions.”

However, “it’s a long-run issue that we definitely need to face, and ultimately, will have no choice but to face,” he added.

The Fed chief’s comments came as the annual U.S. deficit reaches new sustained highs above $1 trillion, a fact many economists worry could spell trouble for future generations. Annual deficits have topped $1 trillion before, but never during a time of sustained economic growth like now, raising concern about what would happen if a recession hits.

Total U.S. debt is about $21.9 trillion, of which $16 trillion is owed by the public. In part because of continued rate increases under Powell, the interest cost on that debt could start to become a bigger and bigger burden.

Wall Street’s “bond king” and respected financial prognosticator Jeffrey Gundlach said in December that the Fed seems to be on a “suicide mission,” raising rates while the government deficit increases as a share of GDP. Normally when the deficit is expanding, the Fed would be lowering interest rates.

Gundlach added that the economy appears to be slowing “and maybe the supply makes it so rates don’t go down with economic weakness.”

Fitch Ratings — one of the top credit rating agencies that analyzes companies and governments alike — said Wednesday that the ongoing government shutdown could soon start to impact its ability to pass a budget and could impact the government’s triple-A sovereign score.

 

Fuzzy’s fuzzy calculations…

U.S. Government Debt$6tr
Initial Interest Bill$132bn at 2.2%
U.S. Government Annual Income$3.2tr
Interest costs as a percentage of income4%
Annual Government Deficit$1tr

5 years from now…

Debt will be$11tr
Income (allowing for annual GDP growth rate) around$3.5tr
Interest costs as a percentage of income7.6%

10 years from now…

Debt$16tr
Income$3.9tr
Interest costs as a percentage of income9%

Peter Graham is an Authorised Representative (No.335948) of Delcor Advisory Group Pty Ltd, a Corporate Authorised Representative (CAR 1266622) of Delcor Asset Management Pty Ltd (ACN 605 111 760, AFSL 475210). Peter Graham is the author of Fuzzynomics newsletter. His views do not necessarily reflect the views of the Delcor Financial Group Ltd. This publication is intended to provide general advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on any information contained in this publication you should consider its appropriateness having regard to your objectives, financial situation and needs.


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