FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 19, 2017
- National Debt Tops $20 Trillion, Equal to 107% of GDP
- Debt Held by the Public vs. Total National Debt
- IMF: Global Economy Looking Strong in 2017 & 2018
- Global Economy Doing Something It Hasn’t in 7 Years
- Fed Meeting Today, Tomorrow – Change Expected
We touch on several bases in today’s letter that are not entirely related. We begin with the 800-pound gorilla in the room – the fact that the US national debt topped $20 trillion last week. With everything else going on in the world right now, this scary milestone received little attention in the media, but I have some thoughts on the subject.
And there are several other topics I will raise in today’s letter related to the improving global economy that I think you’ll find interesting. We’ll conclude today’s discussion with my thoughts on this week’s Fed policy meeting which ends tomorrow and what we might expect to hear from Janet Yellen & Company Wednesday afternoon. Let’s get started.
National Debt Tops $20 Trillion, Equal to 107% of GDP
The US national debt reached $20 trillion for the first time ever last week after President Trump signed a bipartisan bill temporarily raising the nation's debt limit for three months.
While at Camp David, Mr. Trump signed a bill to increase the statutory debt limit last Friday by almost $318 billion, according to the Treasury Department. Before the bill's passage, the US national debt was sitting at the $19.84 trillion limit. The $318 billion increase raised the US national debt to $20.17 trillion on Friday.
The legislation allowed the Treasury Department to start borrowing again immediately after several months of using "extraordinary measures" to avoid a financial default. The bill passed in the Senate last Thursday 80-17 and in the House 316-90 on Friday. Around $15 billion in emergency funding for Hurricane Harvey recovery efforts was attached to the borrowing measure.
Mr. Trump shocked many Republicans by cutting an unexpected deal with House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer last Wednesday, which permitted the three-month debt ceiling increase in exchange for quick action on Hurricane Harvey aid and short-term spending.
The most important point in the chart above is that our national debt is now well over 100% of Gross Domestic Product. This percentage will only go higher over time due to running budget deficits every year. The Congressional Budget Office (CBO) estimates the deficit for FY2017, which ends this month, will be between $600 and $700 billion.
Debt Held by the Public vs. Total National Debt
As you read other articles about our $20 trillion national debt, you’ll almost certainly see writers who claim that our debt is only about 77% of GDP, not 107% as shown in the chart above. That’s because they only count “Debt Held by the Public,” which as of last Friday was apprx. $14.6 trillion.
What they don’t count is the other apprx. $5.5 trillion of so-called “IntraGovernmental Debt.” This is debt owed to various government agencies and trust funds (including the Social Security Trust Fund) in the form of Government Account Series (GAS) bonds. Some in the media say this is money we owe to ourselves, so it shouldn’t count. To that I say hogwash!
The GAS bonds mature just like Treasury securities and have to be rolled over periodically. More importantly, they count against the debt ceiling. If it’s not real debt, why is it counted against the debt ceiling? So keep in mind when someone quotes only the debt held by the public, they are choosing not to count the other $5.5 trillion currently in intragovernmental debt. In my view and others, this is very misleading.
In closing this discussion on our national debt topping $20 trillion, let me mention that I have been writing this newsletter (in one form or another) for 40 years. In looking back, I would say that my warnings about the national debt have been one of my most common themes. Yet thus far I’ve been wrong. I would never have dreamed we could get to $20 trillion in debt and not be in a depression, but here we are.
For the record, I still believe our massive debt will crush us at some point. The timing is impossible to know, but then again, Japan’s debt is estimated to be 250% of its GDP, versus our 107%. So we should all keep an eye on Japan since the coming debt crisis should hit them first.
We should all keep an eye on interest rates as well. If rates ever normalize (ie – move significantly higher), that could well be the catalyst for debt defaults around the world, the US included. That doesn’t look likely for at least a couple more years.
IMF: Global Economy Looking Strong in 2017 & 2018
The International Monetary Fund (IMF) updated its global growth forecasts back in July and maintained that the developed world is on-track for a strong performance overall in 2017 and a slightly better year in 2018. In its latest World Economic Outlook, the IMF forecasted global economic growth of 3.5% in 2017 and 3.6% in 2018.
The IMF said that it has upgraded its economic forecasts for Japan and China based on stronger than expected performance earlier in the year. The IMF noted that it also may be looking to revise Europe higher in its next report in October since there is evidence of stronger growth in the Euro Area.
On the other hand, the IMF downgraded its forecasts for the US from 2.3% (2017) and 2.5% (2018) to 2.1% for both years. But that was before the Commerce Department reported that US GDP rose by 3% in the 2Q. So it remains to be seen if the IMF will revise its US forecast higher in its next report due out in October.
The bottom line is that the IMF expects economic growth in the developed world of at least 3.5% for 2017 and 3.6% for 2018. One caveat: the IMF report summary that I read made no mention of North Korea and the growing threat of military action in the region; I’m sure that will be addressed in the next report.
Global Economy Doing Something It Hasn’t in Seven Years
As discussed just above, most of the economies in the developed world are picking up steam, and so are most of the companies that make them up – making this the first simultaneous global economic recovery in years. On Wall Street, they are calling this a “global synchronous recovery” with stock earnings per share (EPS) rising briskly across the major regions.
"We expect all the major markets to report healthy EPS growth in 2017. That's the first synchronized upturn since 2010," wrote Robert Buckland, chief global equity strategist at CitiBank Research recently. Buckland predicted that all major markets will report strong earnings growth in 2017.
"That's a big change compared to recent years, when we had various regions and countries moving in and out of EPS recessions," Buckland added. "This eight-year