BILL MCCOLLUM
$40 Trillion is the amount of federal debt outstanding. It is a staggering number in absolute terms. And it is a number that is growing exponentially: $1tn (1981), $5tn (1996), $10tn (2008), $20tn (2017), …
The federal government has a chronic spending problem. For the past 25 years it has been running budget deficits, spending more than it makes. The Department of Treasury has had to issue debt each year to make ends meet. The debt burden has grown so large that annual interest payments on the debt exceed national defense spending!
In a recently published Wall Street Journal op-ed, Stanley Druckenmiller encapsulated the predicament as follows: “(The long-term Treasury yield) is the only fiscal disciplinarian the U.S. has left. Neither party will run on entitlement reform. Both have spent the past decade expanding commitments while ignoring arithmetic.” (Mandatory entitlement programs, notably Social Security, Medicare and Medicaid, comprise 73% of the federal budget.)
Who is Stanley Druckenmiller? Outside of the institutional investment world, most people have never heard of him. He mentored US Treasury Secretary Scott Bessent while at Soros Fund Management – yes, the same George Soros who famously “broke the Bank of England” in 1992 by shorting the British pound. Both he and Bessent have a keen understanding of the subject matter; this time, though, Bessent is playing defense as the government’s “chief bond salesman”.
The government wields power that private borrowers like us do not. Bessent’s Treasury Department just preemptively flexed its “financial repression” muscles twice last month to manipulate long-term rates lower: indirectly, by propping up the Japanese Yen and directly, by refinancing long-term Treasury bonds. And then there’s the Federal Reserve, which sets the level of short-term interest rates and, when needed, injects liquidity into the bond market by purchasing Treasury and Agency bonds from member banks. (Call me for the translation.)
Do we have a national debt problem? Yes. Is it terminal? No, not necessarily. Contrary to what many believe, there is no magical debt level or debt-to-GDP ratio beyond which fiscal turnround is impossible. In recent years, economic growth has spurred revenue (tax receipt) growth, and federal spending has slowed somewhat.
My son-in-law is an engineer, and engineers like to talk about root causes. In this case, the root cause is, unsurprisingly, poor political governance. Elected officials on both sides of the aisle have failed to restrain themselves and control government largesse. To the contrary, they continue feeding the pig…with our money. They are the problem. They lack the political courage to take actual action on their watch. Why? They play the political game, and that requires promising their constituents more, not less, of Uncle Sam.
The good news is that markets are stronger than governments. This time around, the Treasury was quick to silence the bond market when it signaled higher long-term borrowing rates from the world’s largest debtor. Next time, or the next, or the next could be different. Absent discipline within comes discipline without.
Bill McCollum is an investment advisor representative of Wingo Asset Management, LLC, a Registered Investment Advisor. The views expressed are his.