The conservative Washington Times ran a story that should be front-page news in every American newspaper. The Congressional Budget Office projects an additional $12 trillion in federal debt over the next decade. It will reach $30 trillion.
What the article neglects to mention is this: there is an unspoken agreement between Congress and the CBO. The CBO refuses to forecast future recessions. You can search Google for "CBO" and "recession." You will find only references to past recessions. Whenever you read CBO projections of the future economy, the forecasts never mention economic contraction, only possible rates of economic growth.
This is almost never mentioned by the media. Last year, two UCLA economics professors and a professor of law -- William Simon, Jr., the son of the former Secretary of the Treasury -- wrote an Op-Ed piece. In it, they briefly mentioned this fact.
Every year, the CBO produces a 10-year and a longer-term forecast of the future path of America's potential output. This is the size of our future real GDP that we should expect, absent the temporary and unpredictable factors that influence the economy, such as the business cycle.
Right. Ignore the business cycle. It's unpredictable, so we should ignore it.
This is the methodological elephant in the living room. As I hope to show, this elephant is not alone. He has brought along a relative.
The CBO's unwillingness to mention recessions explains why, from the recession of 1948 to the recession 2007-9, the CBO did not forecast one recession. Neither did the Federal Reserve System. This is mentioned in a book by Norman Frumkin, The Recession Prevention Handbook: Eleven Case Studies, 1948-2007.
Then of what value is a CBO forecast? Amusement, of course. In this regard, it is a lot like Congress. But a CBO forecast identifies the acceptable upper limit on Congressional rhetoric regarding the federal deficit. We should therefore regard any CBO projection on the federal deficit as a low-ball projection. It is likely to be the best-case scenario -- something acceptable to Congress, especially in an election year.
In the last recession, federal deficits were $1.1 trillion a year for 8 consecutive years. The debt in September 2007 was $9 trillion. In September 2014, it was $17.8 trillion. Only in fiscal 2015 did the increase slow to $326 billion. These figures are from the U.S. Treasury.
Remember, this applies to the on-budget debt. It ignores the off-budget unfunded liabilities of Medicare/Social Security/Medicaid.
Nevertheless, it is always amusing to read CBO forecasts, or at least extracts of CBO forecasts that are translated out of the CBO's economic jargon. With this in mind, consider the article on the deficit posted by The Washington Times.
The federal government will be flirting with $30 trillion in debt within a decade, the Congressional Budget Office reported Monday, blaming an aging population, new spending and tax cuts approved on Capitol Hill, and the growing burden from Obamacare for erasing the progress Washington had made over the past few years . . .The economic front is somewhat brighter for Mr. Obama, who seven years into the recovery will finally see significant sustained growth of 2.5 percent this year and 2.6 percent next year, the CBO said.
That will be followed by a cooling off, with growth dropping below 2 percent in 2019 and 2020. The economic gains will continue to go disproportionately to the wealthy, helping boost income tax revenue but limiting payroll taxes, which will put even more pressure on the entitlement programs that are driving up deficits.
The biggest fiscal dent, however, was made late last year when Mr. Obama and the Republican-run Congress struck a deal. The president won significant spending hikes, and Republicans insisted on a new round of special tax breaks that, combined, reversed years of progress and added nearly $750 billion to projected deficits over the next decade.
The projected extra deficits are therefore $75 billion a year -- chump change, really, compared to what is going to happen.
Deficits will continue to rise over the next 10 years, topping $1 trillion again in 2022 and reaching $1.4 trillion in 2026, the analysts said.The accumulation of those deficits will deepen the gross public debt from $18.1 trillion at the end of 2015 to $29.3 trillion in 2026. By contrast, the debt stood at $10.6 trillion when Mr. Obama took office in 2009.
Looking decades into the future, the picture only gets worse, the CBO said.
"Beyond the 10-year period, if current laws remained in place, the pressures that had contributed to rising deficits during the baseline period would accelerate and push debt up even more sharply. Three decades from now, for instance, debt held by the public is projected to equal 155 percent of GDP, a higher percentage than any previously recorded in the United States," the analysts concluded.
If the deficits of the 2007-9 recession and recovery are a foretaste of things to come, the federal deficit will rise by an additional $9 trillion if recession hits in fiscal 2017. That would mean a federal deficit of $38 trillion in 2026.
At some point in the next decade, investors are going to figure out that the U.S. government will not be able to pay interest on this debt without mass inflation, followed by hyperinflation. Rates will then return to historic levels of 6% or higher. This will cause greater insecurity regarding repayment. Rates will climb to double-digit levels.
Think of paying interest on a $38 trillion debt if combined rates are a mere 10%. That would be $3.8 trillion a year in 2026.
The entire federal budget for fiscal 2016 is estimated at $3.6 trillion.
The voters are blissfully unaware of any of this.
The deficit has not come onto the radar in the Republican debates.
This is the mastodon in the living room. No one mentions it.
You may think, "It will not happen in 2026." Fine. Then what will be the on-budget debt be in 2036? Will it reach $75 trillion? Will rates be 10% then? Will payments on interest be $7.5 trillion? Or higher?
The Great Default will take place before this happens.
I don't know how long Congress can kick this can. I do know this: the election of 2016 will not focus on this looming catastrophe. Because it is a bipartisan disaster, and because there is no acceptable political solution that voters will authorize, the can will be kicked this year. And next year. And in 2018.
This is the burning trestle. The federal train wreck is inevitable. It will change the political landscape as nothing has since the Great Depression.
If you think Congress does stupid things today, think of what it will do when the fiscal can is too large to be kicked. Think of the finger-pointing, the blame-shifting, the dead rabbits pulled out of politically acceptable hats. Think of this:
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.