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Goldman Sachs: Fiscal outlook for US ‘is NOT good’

Although the matter of the national deficit has faded from view during the Trump presidency, investors still worry about future effects on the US economy.

Goldman Sachs expressed its concern over the matter of the continuing huge budget overruns the United States Government amasses every year. CNBC reported that Jan Hatzius the chief economist at Goldman, predicted the annual budget deficit rising to over $2 TRILLION by 2018, an amount that is projected to be about seven percent of the Gross Domestic Product (GDP) for that year.

He further noted:

“An expanding deficit and debt level is likely to put upward pressure on interest rates, expanding the deficit further… While we do not believe that the U.S. faces a risk to its ability to borrow or repay, the rising debt level could nevertheless have three consequences long before debt sustainability becomes a major obstacle.”

And what are those three consequences? According to Thomas Franck at CNBC:

  1. Although economic growth should indeed jump above 3 percent in 2018 thanks to the stimuli of the tax cuts passed into law at the end of 2017, the Congressional Budget Office expressed the belief that the acceleration will likely prove brief, and debt held by the public will soar to $28.7 trillion by the end of fiscal 2028.That could create a difficult situation for Congress if the economy faces a downturn in the near future, which would hamper legislators’ ability to provide additional fiscal stimulus.”Lawmakers might hesitate to approve fiscal stimulus in the next downturn in light of the already substantial budget deficit,” the economist said. “While we would expect some additional loosening of fiscal policy during the next downturn, there is a good chance in our view that it would be less aggressive than it was in the last few recessions.”
  2. But even if the debt and deficit levels don’t prevent lawmakers from approving countercyclical fiscal stimulus during the next recession, a political desire to stabilize the debt level would likely arrest growth during the next recovery, the Goldman team explained.”The current fiscal expansion … must at some point give way not just to a neutral stance, which we expect by 2020, but to a tightening of fiscal policy that could restrict growth,” Hatzius wrote.

Finally, the economist explained that regardless of how much longer the current expansion persists, increasing deficits and debts naturally put upward pressure on interest rates, expanding the deficit further.Goldman Sachs estimates that a 1 percentage point increase in the budget deficit raises the 10-year Treasury yield by roughly 20 basis points when the economy is at or beyond full employment, as it appears to be currently.

Surprises are clearly possible in both directions, but we believe the risks are tilted in the direction of larger deficits than projected,” Hatzius concluded. “While we expect Congress will eventually address the widening budget gap, it also seems quite likely to take longer than most market participants might expect.”

One disturbing statistic that Hatzius and Goldman also noted was that the total US debt was likely to rise to an amount equivalent to the actual GDP by 2028. This comes from the Congresssional Budget Office’s (CBO) April 2018 study on the matter. The CBO is widely regarded as a non-partisan “watchdog” that gives accurate and non-politically motivated projections.

The further projection shown below shows how this takes place. Although the budget deficit from year to year does not exhibit a large percentage increase, it is already very large and the trend shows that it will only become larger over time.

Despite the conservative swan song of balancing the budget and lowering taxes, 2017 featured a budget deficit of $665 billion, and 2018 is expected to have an $804 billion deficit (partly due to the $1.3 T “omnibus” spending bill that angered the President, though he signed it so as to strengthen military funding and other matters he thought too important to lose.)

The Congressional Budget Office (CBO) has a slightly more optimistic view than Goldman Sachs does. However that optimism only goes so far as to say the growth in deficits and debt will be a bit slower than Goldman predicts. For example, according to the CBO report, by the time 2028 arrives, if the trends hold, the deficit projection is expected to $1.526 Trillion just for that year alone. This is astronomically high, but it comes in about 25% lower than the $2 Trillion that Goldman predicts for the same year.

At any rate, the total national debt is expected to reach parity with the GDP in that period of time. By 2028, the publicly held debt is expected to be at about 96% of GDP, a percentage level which has not been seen in the USA since WWII.

The general understanding of budget overruns is that these are very bad things. That being said, Goldman does not appear terribly concerned, nor does the CBO. Macroeconomics are sometimes held to follow a different set of rules than the personal-level economics shared in common by most individuals and small to rather large businesses. Further, speculation on the country’s (or the world’s) economic future has been proven over and over to be a very fuzzy science.

However, the notion of a national debt growing to nearly US $30 trillion is not a comforting thought, especially when contrasted with other great powers such as the Russian Federation which holds a rather low debt presently of $1,306 per person. China presently has a debt level of $3,709 per person. The US, as of May 21, 2018 carries a debt load of $64,996 per citizen. 

This is a situation which has not yet been resolved and it does not appear to be sustainable. And at this time, there appears to be no solution offered to fix the problem.

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