A Grim Look at the Exploding US Budget Deficit

Mish

The non-partisan Congressional Budget Office paints a sorry picture of US government  spending.

Debt Will Be Double the Size of the Economy by 2051 

The CBO estimates Debt Will Be Double the Size of the Economy by 2051 

CBO estimates that federal debt held by the public will reach double the size of the economy, rising from 79 percent of Gross Domestic Product (GDP) at the end of 2019 and 100 percent of GDP at the end of Fiscal Year (FY) 2020 to 202 percent of GDP by 2051. Projected debt in 2051 will be over 4.5 times the 50-year average of 44 percent of GDP and will be on track to double the previous record of 106 percent of GDP a few years later. In nominal dollars, debt will grow from $28 trillion today to over $133 trillion by 2051. 

Actual debt levels could be higher than CBO projects. Under an alternative scenario that assumes lawmakers enact an additional $2 trillion of fiscal support in response to COVID-19 (similar to the American Rescue Plan), extend most expiring tax cuts, and grow annual appropriations with the economy instead of inflation, debt would total 259 percent of GDP by 2051.

Budget Deficits

federal budget deficits 2003-2051

Budget deficits had already risen before the pandemic from 2.4 percent of GDP ($442 billion) in 2015 to 4.6 percent of GDP ($984 billion) in 2019 and set a new record of 14.9 percent of GDP ($3.1 trillion) last year due to the crisis. CBO expects the deficit to fall to $2.3 trillion this year and hit a low of $905 billion in 2024 before resuming its upward trajectory. The deficit is projected to total 5.7 percent of GDP ($1.9 trillion) in 2031, 9.4 percent of GDP ($4.4 trillion) in 2041, and 13.3 percent of GDP ($8.8 trillion) in 2051. 

Rosy Scenario

Those projections constitute rosy scenarios. 

Why? 

They do not factor in recessions. The prior budget projections did not factor in Covid, the Great Recession, or the DotCom bust.

The CBO does not see and has not factored the next recession into any of these scenarios.

Social Security

CBO also projects that four major trust funds will be insolvent in the next 14 years. The Highway Trust Fund would become insolvent in 2022, the Medicare Hospital Insurance trust fund would run out in 2026, and the Social Security Old Age and Survivors Insurance and Disability Insurance trust funds would run out in 2032 and 2035, respectively. The hypothetical combined Social Security trust fund would run out in 2032, at which point benefits would have to be cut by one-quarter to bring spending in line with revenue.

Spending Projections

The projected long-term growth in spending is largely driven by rising health, interest, and retirement costs. CBO expects spending in these three areas to rise from 12.3 percent of GDP this year to 24.4 percent of GDP by 2051. Interest spending will be the largest federal program by 2045. 

Read that last sentence again and again until this sinks in: How the heck is the Fed ever going to hike rates again?  

"Existential Threat"

We are on auto-pilot for a global currency crisis because the current path is not remotely sustainable.

But hey, rumor has it that climate change is the "existential threat" of our time, so much so that politicians seek $90 trillion solutions to the problems. 

I assure you the world will still be here in 50 years even if the oceans do rise another 3 inches. But what about the value of the US dollar?

For discussion, please see Don't Accept 100% of the Climate Change Story and You Get Labeled a Racist

Currency crisis or not, the more immediate concern should be obvious.

Mish

Comments (66)
No. 1-30
Varth
Varth

Where one see's debt others see wealth. We live in a debt based fiat monetary system (worldwide) with double entry bookkeeping. For every debt someone holds the corresponding asset. Sure would be nice to have first access to the debt created, which some families have the divine right to do. Helps explain the growing wealth inequality - and IMO, it is not going to get better until it breaks.

Eddie_T
Eddie_T

One mustn't look at the abyss, because there is at the bottom an inexpressible charm which attracts us.

                                 --------- Gustave Flaubert
ZZR600
ZZR600

I'm sure the occasional war also needs to be factored in. Gulf War III...or is it IV (lost count) will probably add few 10s of trillions to whatever the forecast is

KidHorn
KidHorn

When will the FEDs balance sheet > US GDP. Could happen before the next election.

dbannist
dbannist

I believe the biggest economic problem facing the US is and will continue to be a cultural one.

People are expecting more and more free money. The deficit is merely a symptom of that problem.

If the culture of America had remained one of personal independence and diligent savings and work we would not be where we are today.

The entitlements have done nothing to help the poor. It has merely created more of them by creating massive disincentives for marriage, and as stats show, kids raised in single parent homes almost always copy that and become another poverty stat.

Entitlements are rotting America. They need to go, but they never will. Once an entitlement becomes law it's nearly impossible to reverse due to the election cycle. If you promise to cut an entitlement you will never get elected.

Only when collapse is imminent do things change and by then it's too late.

Zardoz
Zardoz

I rank massive weather and crop disruption, forced migration, and famine above the perceived value of pieces of paper... but neither situation is good.

WarpartySerf
WarpartySerf

Maybe when Americans wake up to the brutal Class Warfare that the ultra rich exert upon America - as they own both levers we get to pull,-something will change.

Demopublican multi-millionaires and Republicrat multi-millionaires are very much the obscene problem America has- they don't even deserve one lever in our elections, let alone both of them.

PostCambrian
PostCambrian

I don't disagree with your concern about the US budget but the world will still be here even if the dollar isn't so you are guilty of hyperbole. It would be helpful if the Republican party actually had some kind of real, well thought out ideas. Unfortunately the Republicans have worse than nothing so even the lame idea of giving out free money makes the Democrats look smart in comparison. Competition makes things better but the two parties are a race to the bottom by different paths. Given the choice I prefer the Democrats path because I still believe in truth and facts over lying, corruption, and the idea that nothing should get in the way of making money. However I would prefer the road of economic conservatism and social liberalism. For some reason they seem to be mutually exclusive in our party system.

simb555
simb555

Look at history. Gold and Silver rise together with a falling $ when US budget explodes. Mining stocks (GDX) are a levered bet on rising precious metal prices.

simb555
simb555

Look at history, Gold and Silver rise together with a falling $ when US budget deficits explode. Mining stocks (GDX) are at 6 month lows and are a levered bet on rising precious metal prices.

LawrenceBird
LawrenceBird

Not that I love taxes but do consider this country was able to thrive under a much higher tax code. Of course, income distribution was considerably flatter too.

PecuniaNonOlet
PecuniaNonOlet

Lots of people here keep comparing things to the past except the past doesn't exist anymore. It's not just this post but almost everyone. "Back in my day..." or "50 years ago" or "when the founding fathers..."

That's all great for a history lesson but the world changes every second on so many levels and so many dimensions that it is really pointless to look at the past. What gold, stocks, bonds, oil, bitcoin, or your grandmother did last year is largely irrelevant today. Even debt is irrelevant, remember when the deficit hit a trillion decades ago and people were in panic back then? Well we're at 30 trillion and it's going to the moon and no one cares except for feigning republicans.

The real lessons is this: NO ONE is going to SAVE YOU. Neither repubs or dems are going to save you. Every time there is a disaster like winter freeze, hurricane, earthquake, tornado, tsunami, you will get some initial help but that's about it. The pandemic has kicked in a few extra dollars but that won't save you either, just tide you over for a month or two.

It's game on, you are on your own. Go out there and make something of yourself and remember pecunia non olet.

BobSmith
BobSmith

Yes, a currency crisis is not out of the question. But there's nothing to replace it. Euro? Yen? Bitcoin? Give me a break. And gold will be suppressed/heavily taxed.

Sechel
Sechel

These were all problems but the Republican tax cuts durig Trump's Presidency changed and accelerated the trajectory. Totallally irresponsible. Can't have an intelligent conversation about entitelments when reversing the tax cuts and flattening out the corportate tax rate isn't even on the table. And by that I mean getting rid of some of the deductions. There's simply too much corporate welfare. How about we means test corporate tax breaks. Some very profitabable businesses not paying taxes

Sechel
Sechel

Last president who ran a budget surplus was Bill Clinton. What did Bill get right? What did we do wrong afterwards?

BobSmith
BobSmith

Climate change is becoming a religion in the West, simple as that

ColoradoAccountant
ColoradoAccountant

You can't have open borders and a welfare state. You have to choose one or the other or neither.

Jojo
Jojo

Politicians are going to spend one way or the other. That is how they get elected/reelected. Might be less debt if more taxes were collected.

asteester
asteester

Economic inequality is a major problem. It is just so hard to spread word that it is structural in the Fed and the rights of first money as opposed to the loopholes carved out for Industry (also bad) and definitely not the fault of Capitalism (the most popular belief). Thanks Mish for your blog. Helps me with my own arguments and stories I can tell my circles.

Scary to think that Interest payments will be the biggest Fed cost. And who those people are that are getting those payments.

RonJ
RonJ

"We are on auto-pilot for a global currency crisis because the current path is not remotely sustainable."

But the current path is inevitable. Human nature is demanding it. Parabolic arcs complete themselves. No one is going to stop the freight train.

I read the other day that Venezuela just printed a 1 million Bolivar note. Supposedly, about all it is good for is public transportation, which still uses currency.

rodgerreno
rodgerreno

so apparently the way that people think is brought about by the opinions of well educated men and women of vast experience. i certainly am not one of them. i did hear something today about inflation remaining low for decades. this is apparently a problem. it occurred to me that wages have been low for that same time period. seams to me that a living wage tied to true inflation would cure the inflation problem and create a less stressful nation. most of the social net would no longer have funding problems as more people would be contributing more. i'm certain it can't be that simple. surely we aren't going to hell in a handbasket because of greed.

bradw2k
bradw2k

Cheer up guys, in 2051 your grandchildren will be worried about money just like you were but there will be flying robots.

Casual_Observer
Casual_Observer

Who do we owe all this money to ? Mostly ourselves. Net out the debt between countries and subtract the liabilities from the assets and the debt picture has another 40 years to play out. Look at Japan.

Pontius
Pontius

Not a question of if but when world losses confidence in using dollar for international exchange. US, unlike any other nation, has unique ability to create reserve currency with a key stroke to fund its profligate spending habits. Effectively a tax on all other countries as dollar is debased. Look for emergence and acceptance of decentralized, globally accepted, digital currency to emerge for international payments. Not Bitcoin with limited issuance. Imagine the Swiss promoted and managed digital currency?

Roadrunner12
Roadrunner12

"The projected long-term growth in spending is largely driven by rising health, interest, and retirement costs. CBO expects spending in these three areas to rise from 12.3 percent of GDP this year to 24.4 percent of GDP by 2051. Interest spending will be the largest federal program by 2045."

"Read that last sentence again and again until this sinks in: How the heck is the Fed ever going to hike rates again?"

Just focusing on the the US govt debt of 30 so trillion, a 5% interest rate would result in 1.5 trillion in interest payments. I would expect a 40 trillion dollar debt over the next 10 years. Its a no brainer that interest spending will be the largest federal program, only a question of when.

Delaying interest rate interest rate increases is kicking the can down the road and there will be a day of reckoning, when that is, I dont know. The world is awash in debt. Theres going to be a lot of hurt one way or the other. For my two cents, it would be better to let the free market decide what interest rates should be, yes there will be a lot of hurt or we can live with death by a 1000 cuts as is likely the path forward.

oee
oee

We should reverse the Trump's tax cuts to lower the deficit.


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