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The guest commentary below was written by economist Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye. |
The latest Congressional Budget Office (CBO) budget and economic outlook estimates show the extent of the challenges of the United States fiscal nightmare.
The CBO expects a budget deficit of $1.9 trillion in 2024, a year of alleged robust economic growth and record tax receipts. They expect revenues to reach $4.9 trillion, or 17.2 percent of GDP, in 2024, which will rise to 18.0 percent by 2027 and remain at that level until 2034.
This report’s main finding is alarming. Despite expecting no recession and rising tax revenues from 2024 to 2034, the budget deficit will explode from $1.9 trillion to $2.8 trillion by 2034.
Estimates place the adjusted deficit at 6.9 percent of GDP by 2034, nearly twice the average of 3.7 percent over the previous 50 years.
What is the problem when the CBO sees solid growth and rising revenues? Deficits are always a spending problem. By 2034, they expect outlays to soar from $6.8 trillion to $10.3 trillion, or 24.9% of GDP. Interestingly, one of the major reasons for the significant increase in outlays cited by the CBO is the soaring cost of debt. According to the report, debt swells from 2024 to 2034 “as increases in interest costs and mandatory spending outpace decreases in discretionary spending and growth in revenues.” Public debt rises from 99 percent of GDP in 2024 to 122 percent in 2034, or $50.6 trillion, to which we must add the public debt held by other entities, including the Fed. The CBO considers “debt held by the public” to be $28 trillion in 2024, when public debt is already $34 trillion. Thus, United States public debt will increase by $22 trillion in a decade.
The CBO projections prove without a doubt that there is no way in which the United States could balance the budget through revenue measures. There is no set of revenue measures that can collect $2 trillion per year in additional annual receipts. Increases in taxes would inevitably slow down investment and growth and reduce long-term potential receipts. Furthermore, even if the United States government was able to increase revenues, the likelihood of a recession in the next ten years, added to the promises of more “extraordinary” expenses in election years, would make the deficit soar regardless of any revenue improvement.
An economy that generates an annual deficit of 6 percent of GDP to achieve a mere 2 percent annual growth is on a dangerous path, even if that kind of growth is sustained. Inevitably, at the first sign of a recession, the government would spend even more.
Why should Americans be worried about this reckless pace of borrowing? Because it will mean three things for them: higher taxes, weaker growth, and the declining purchasing power of their salary and savings.
If you hail deficit spending, you are embracing impoverishment. If you defend this kind of deficit spending, you are actively supporting stagnation.
Deficit spending is not a social policy; it is profoundly anti-social. It means passing the burden of the state on to the next generation, making the unborn poorer before they see the light of day.
The next administration is unlikely to eliminate this irresponsible borrowing path if they continue to increase taxes and entitlement programs. The only way in which this path of monetary and fiscal destruction is eliminated is with pro-growth policies that lift the GDP growth trend, incentivize productivity, and promote business growth.
The combination of a sound monetary policy and pro-growth fiscal policies will help the United States maintain its leadership status and the dollar as the world’s reserve currency.
The current policy of imprudent monetary policy, disguising the rising size of government with inflationary policies, will only lead to stagnation and the loss of world reserve status.
If the next administration wants the best for Americans, it must stop the deficit bleeding and subsequent monetization through central bank policies that make citizens’ lives more expensive and their dreams of prosperity vanish.
The current budget trend leads to stagnation, a bloated government, and unacceptable taxes. If you copy the policies of France, you get the lack of growth, high debt, and elevated unemployment of France.
There is no magical revenue measure that will stop the borrowing bleeding in the United States. Monetizing debt will continue to erode the middle class and weaken the economy, as well as perpetuate inflation, the hidden tax.
The United States has tried the European way and failed. It has delivered a debt-bloated GDP with declining consumer confidence and the destruction of the purchasing power of the currency.
Now is the time to implement sound money and responsible fiscal policies. Any other policy will fail and accelerate the decline of America.
ABOUT DANIEL LACALLEThis is a Hedgeye guest contributor piece written by Daniel Lacalle and reposted from his website. Daniel Lacalle is a PhD in Economy and fund manager. He holds the CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).
Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions.
Mr Lacalle is a professor at IE Business School, IEB and has also been a guest teacher and speaker at the London School of Economics invited by professor Daniel Beunza, and UNED University. Twitter handle: @dlacalle_IA LinkedIn: Daniel Lacalle |
