In “The Gentleman” series on Netflix, a young British army officer named Eddie Horniman finds out that his father has died in England. When he returns home for the funeral, READ MORE
An Abdication of Fiscal Responsibility
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
Next Moves for the Fed and BRICS+
The Federal Reserve’s Open Market Committee (FOMC) meets Tuesday and Wednesday of this week. The FOMC meets approximately every 6 weeks and releases their policy statement at the end of their two-day meetings. The consensus expectation is that the FOMC will announce an increase in the fed funds target rate of 75 basis points this week.
When Chairman Jerome Powell gave testimony to Congress on June 23, he noted that inflation remained “well above our longer-run goal of 2 percent” while the “labor market has remained extremely tight.” Not much has changed during the last four months regarding both inflation and employment. The rationale for higher interest rates remains in place for now. Interest rates remain far below the level of inflation as measured by the government. However, in the future, there are limits to how much the Fed can raise rates.
As of September 30, 2022, the US Treasury has $30.9 trillion of debt outstanding, reflecting a debt/GDP ratio of 123%. In December 1980, when Fed Chairman Paul Volcker raised the fed funds rate as high as 22%, the US Government had $908 billion in debt, which represented 32% of GDP. Since the US debt to GDP ratio has nearly quadrupled during the last 42 years, the Fed will eventually have to consider the impact of higher interest rates on the interest expense of the US Government, as well as businesses and households. Higher interest rates raise the risk of debt defaults. It remains to be seen where the tipping point of financial pain is due to higher interest rates.
Meanwhile, in the rest of the world, the dynamics of international relations are changing rapidly and the United States is losing its leadership role. ZeroHedge described the recent protests in Europe:
Tens of thousands of people have marched across metro areas in France, Belgium, the Czech Republic, Hungary, and Germany – many of them are fed up with sanctions on Russia that have sparked economic ruin for many households and businesses – but also very surprising, support for NATO’s involvement in Ukraine is waning.
There has been increasing awareness and dissent among Europeans about their countries’ leaders prioritizing NATO’s ambitions in Ukraine over their own citizens. The prioritization has been in the form of sanctions against Moscow, sparking energy hyperinflation and supplying weapons to Ukraine, which has made Moscow displeased with any country that does so. Some Europeans are now demanding NATO negotiate with Moscow to end the war so that economic turmoil can abate.
There is also increased interest by many countries in joining BRICS+ (an economic alliance started by Brazil, Russia, India, China, and South Africa). The original five BRICS countries seek to expand their influence by establishing principles of “inclusive and equal cooperation” for international trade and financial regulation. Among the countries being considered for admission to BRICS+ are Argentina, Egypt, Indonesia, Iran, Kazakhstan, Kenya, Mexico, Nigeria, Saudi Arabia, Senegal, Tajikistan, Thailand, Turkey, and United Arab Emirates.
Saudi Arabia’s intention to join BRICS+ is significant. Mohammed al-Hamed, President of the Saudi Elite Group in Riyadh, told Newsweek: “China’s invitation to the Kingdom of Saudi Arabia to join the BRICS confirms that the Kingdom has a major role in building the new world and became an important and essential player in global trade and economics. Saudi Arabia’s Vision 2030 is moving forward at a confident and global pace in all fields and sectors.” Thus, Saudi Arabia’s snubs of President Biden are no surprise as the country realigns its economic and geopolitical interests.
As Saudi Arabia is the largest exporter of oil in the world, there is serious doubt about the longevity of the “petrodollar” (use of the dollar for payment of oil deliveries). Fed Chairman Jerome Powell acknowledged this in June when he said, “rapid changes are taking place in the global monetary system that may affect the international role of the dollar.”
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA