We now know the presumptive presidential candidates. One of them (Trump) has presided over the largest deficits of the last 60 years. The other (Biden) has proposed deficit reduction but he requires Congress to pass tax increases to obtain it. Trump has promised unspecified tax cuts. Republican Congressional candidates have gone "radio silent" on the deficit since Trump emerged as the Republican candidate, since it is hard to favor deficit reduction when your standard bearer wants to cut taxes. Democrats know that sponsoring tax hikes is politically risky, even though the targets of the Biden tax hikes are very-high-income people (income over $400,000) and corporations.
My assumption is that a Trump second term will include no presidential restraint on the deficit. He didn't have it in his first term, and he doesn't argue against deficits. Biden may not have the Congressional makeup to obtain tax changes. So, I think the outlook for continuing large deficits is likely to be realized by either of these presidential candidates. Note that either one of them will immediately become a "lame duck" on their first day in office; therefore, the power in Congress will start out as strong as it can be, regardless of who wins the presidency. So, what is the outlook for the deficit and its impact on the US economy and markets? Before I give my view, I'm going to introduce a five-part series that Wells Fargo has made available. I congratulate Jay Bryson and his team for this series. Jay Bryson is a Managing Director and the Chief Economist for Wells Fargo’s Corporate and Investment Bank. He was Wells Fargo’s Global Economist between 1998 and 2018.
For a history lesson on deficits, including the amounts and percentages to GDP and which presidents had bigger deficits, see “U.S. Debt by President: Dollar and Percentage,” https://www.investopedia.com/us-debt-by-president-dollar-and-percentage-7371225.
Now let's get to Jay Bryson and the five-part series. The summary and conclusions of the report are found here, along with links to the entire series: “Should We Worry About American Debt?: Time to Reconsider?” https://wellsfargo.bluematrix.com/links2/html/becb322d-d263-48ae-b0e7-cc4ad6e4013b.
Kotok's view. There are many research pieces and commentaries about the issue of debt. Cumberland’s writers have published many of them, and there has been some mention of the debt issue in our videos, too. So why am I calling your attention to the Wells Fargo (WFC) series? Because this is not a shrill, “the sky is falling” sort of piece. It is well constructed, and it disaggregates the issues so that a reader can follow them easily.
The 5-part series that shows the current aggregate US debt-to-GDP ratio is about the same as it has been since the Great Financial Crisis (GFC) 15 years ago. Consider that statement.
The US ratio of total debt to GDP is stable.
Those are the 15 years that included the GFC and post-GFC recovery, an inflation scare, a 3–4 year Covid shock, zero interest rates and many special Fed programs, and then the Fed’s abrupt policy change to raising interest rates. There were large Trump deficits. They have been followed by large Biden deficits. And now, the 2024 election year rounds out the list of challenges. That political influence really started in 2023. It included a debt ceiling threat of default, no federal budget mechanism, and a series of political failures with short-term and temporary continuing budget resolutions.
The report also shows how the composition of the total debt has changed. WFC notes that debt burden issues have improved for households. And it shows that corporate debt is manageable. Even mortgage debt, while pressured recently, is in better shape than it was during the GFC period.
So, the increase in the federal debt is essentially offset by the decrease in the nonfederal debt-to-GDP ratio. The total remains about the same.
Let’s unpack that.
If total debt to GDP is unchanged, or nearly so, and it’s the shift in composition that is the concern, then financial-market impacts should be observable if we look for them. Sure enough, they are there. We see the cost of credit insurance on the federal debt rising. I have written about the credit default swap (CDS) issue many times. I also see corporate credit spreads narrowing.
So, is the federal debt load crowding out the private sector? This is much harder to observe. We may discuss it as a concept, but we have difficulty finding measures to estimate whether it is and by how much. Crowding out? Maybe, maybe not.
What about the GDP itself? Over the four Covid years of 2020–2023 total, GDP was about $103 trillion. That was after the reduction of GDP caused by the Covid shock.
Estimates vary about that reduction of GDP due to Covid. The estimates range from $14 trillion to $16 trillion in “lost” GDP. BEA estimates of actual current-dollar GDP for the four Covid years is 2020, $21.4T; 2021, $23.3T; 2022, $25.5T; 2023, $27.4T. BEA estimates that GDP fell in 2020 from the level in 2019. (All GDP statistics sourced at the US Bureau of Economic Analysis, https://www.bea.gov.)
My takeaway is that this is now bullish for the US economy and therefore for US financial markets. In my opinion, the trajectory of growth will be above the estimated trends for many years. We are catching up from a huge shock. The various research sources below and elsewhere indicate that about 1.5 million Covid-19 deaths occurred in America. For two years, life expectancy at birth fell in nearly all age cohorts. I’ve seen estimates of about three years decline at age 35, and by about two years decline at age 65. Demographic experts have opined that these losses have effectively reversed all gains made in the last 40 years.
Most recent data indicate that the decline in life expectancy has stopped. However, long Covid statistics indicate that the DALYs (disability-adjusted life years lost) is still rising. See: http://ghcearegistry.org/orchard/daly-calculator.
Going forward in the catching-up period, real GDP may run “hot” at 3–3-1/2%, which implies nominal GDP around 5–6% depending on the inflation assumption. By the end of this decade, US nominal GDP could top $40T. That implies that the debt/GDP ratio is manageable as long as the primary deficit remains around 2%, which is where it currently is.
What can alter this positive outlook? There are the usual warnings about nuclear war, disease (again), an asteroid hitting the planet, etc.
But the biggest risk, IMHO, is from the dysfunctional politicians in Washington. Still, all they have to do is stop their culture war “hater” politics and put the nation ahead of their political careers. Start by fully funding America’s national defense and then stop the nonsense about no budget process. Is that too much to ask?
The outlook for the United States is very positive. IMHO.
Resources list
“Share of Gross Domestic Product (GDP) lost as a result of the coronavirus pandemic (COVID-19) in 2020, by economy,” https://www.statista.com/statistics/1240594/gdp-loss-covid-19-economy/
“The U.S. Economy and the Global Pandemic, https://www.whitehouse.gov/wp-content/uploads/2022/04/Chapter-3-new.pdf
“The COVID-19 Pandemic and the $16 Trillion Virus,” https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7604733/
“Gross Domestic Product, Fourth Quarter and Year 2023 (Advance Estimate),” https://www.bea.gov/news/2024/gross-domestic-product-fourth-quarter-and-year-2023-advance-estimate
“COVID-19’s Total Cost to the U.S. Economy Will Reach $14 Trillion by End of 202,” https://healthpolicy.usc.edu/article/covid-19s-total-cost-to-the-economy-in-us-will-reach-14-trillion-by-end-of-2023-new-research/
“Chart Book: Tracking the Recovery From the Pandemic Recession,” https://www.cbpp.org/research/economy/tracking-the-recovery-from-the-pandemic-recession
David R. Kotok
Chief Investment Officer
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