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On Saturday, President Biden signed into law “The Fiscal Responsibility Act of 2023” to suspend the nation’s debt limit until January 1, 2025.  As a limiting check on the budget deficit and federal debt, the legislation was a failure.  Congress and the Administration appear to live in an alternate universe when it comes to fiscal responsibility.  As of December 31, 2022, the ratio of gross federal debt to GDP stood at 129% while federal revenue/GDP was at 20%.  Among major countries, only Japan, Italy, and Greece have higher government debt/GDP ratios.

For the first seven months of the federal fiscal year ending September 30, 2023, the US Government has a fiscal budget deficit of $928 billion.  According to the latest projections (May 2023) from the Congressional Budget Office (CBO), the projected budget deficit for the full fiscal year 2023 is $1.5 trillion.  The projected cumulative deficit for the next ten years, 2024 to 2033, is $20.2 trillion.  As a percentage of the economy, deficits are expected to be in the range of 6.0% of GDP in 2024 to 6.9% of GDP in 2033.  Assumptions for the projections do not consider the impact of a recession or a stepped-up war effort.

David Stockman, who was OMB Director for the Reagan Administration and an original partner of the Blackstone Group, was critical of the bipartisan compromise.

The deal does absolutely nothing to change the current “trajectory” toward fiscal disaster because it reduces nary a dime of built-in spending for defense, entitlements/mandatories, veterans, and net interest, while those items account for 89% of the $80 trillion of built-in spending over the next decade.

For Stockman’s detailed criticism, see https://www.lewrockwell.com/2023/06/david-stockman/speaker-mccarthys-rotten-deal/

The US Treasury hit its debt limit ceiling of $31.4 trillion in mid-January and its general account (cash reserves) has been declining steadily since then.  Deutsche Bank strategist Steven Zeng expects net US Treasury debt issuance of $400 billion in June to replenish the general account, followed by $500 billion during the third calendar quarter, and another $400 billion during the fourth calendar quarter.  The increase in federal outstanding debt is expected to pull capital from other sectors of the financial markets and is likely to be accompanied by an increase in interest rates on US Treasury securities.  Some analysts also believe that the US Treasury’s debt issuance is likely to have a negative impact on stock prices.

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA