2023-05-28 09:59:55
He The US debt ceiling has increased 78 times, according to the US Congressional Office of Budgetary Responsibility. It is therefore normal that the markets do not react negatively to this crisis. Negotiations between Republicans and Democrats, though slow, are advancing.
The debt ceiling seems crazy to us if we see it from that very statist European point of view, but it is very important. It forces governments to reduce spending and be more responsible. The United States has credit and the ability to borrow more because it has the world’s currency and reserve bond.. If the United States had the government excess that many European countries have, it would not have the global reserve currency today. Indeed, the United States can get more in debt, but it is not free and it is not eternal.
The United States budget is made up of three parts: mandatory spending, which does not enter into negotiations between parties and accounts for approximately 63% of the total; discretionary spending, which is what is being negotiated and consumes just over 30% of the budget; and close to 7% the cost of debt. The cost of debt, despite having the repurchases of the Federal Reserve and the world reserve currency, has skyrocketed due to the high level of indebtedness that administrations have incurred since 2008. Although the average interest rate is low, the volume of debt consumes an increasing percentage of the budget.
The US debt ceiling is evidence that a country with monetary sovereignty cannot borrow and spend as much as it wants. If adjustments are not made that limit the increase in indebtedness, Confidence in the US currency and debt would plummet, and with it, its status as a reserve currency.
America spends too much. Total spending will exceed $5.9 trillion annually by 2023. Revenues will likely reach $4.9 trillion. This means that the deficit will once again exceed one trillion dollars. Such a large deficit is a threat to the dollar as the reserve currency and to the entire US economy.
Eliminating the deficit via tax increases and revenue measures does not make sense. The deficit skyrockets despite record revenues and an economy at near full employment. The problem in the United States is that governments spend much more than they enter in periods of growth and much more than they collect in times of crisis. This is unsustainable. The largest revenue increase in US history under normal economic circumstances was $300 billion, according to the CBO. Not even doubling that income record will eliminate the deficit.
According to the Biden administration, if current policies continue, the US deficit will not fall below 4% of GDP in any year until 2032. Even in 2032, and assuming no crisis between 2023 and 2032, the deficit annual would be 1.7 trillion. That is, the accumulated deficit 2023-2032 will be 14.4 trillion. America’s fiscal hole is unsustainable because, in addition, the income estimates are extremely optimistic. Between 2023 and 2032, the CBO estimates that revenue will increase every year, there will be no crisis, and it will increase from $4.9 trillion to $7.1 trillion. That is, an increase of 2.2 trillion in income and increases the deficit from 1 trillion to 1.7 trillion. I repeat, there is no measure to increase taxes and collection that eliminates such a fiscal hole. Let’s not forget that all these estimates include real GDP annual growth of 2% and inflation contained at 2%. No year of crisis or recession. Well then, in this clearly optimistic scenario, public debt would not drop below 106% of GDP.
Discretionary spending increased from $1.3 trillion to $1.6 trillion between 2019 and 2020 during the COVID-19 crisis. Since then, and despite the increase in employment, economic growth and the end of extraordinary expenses, the administration has increased discretionary spending to 1.8 trillion. In other words, all “extraordinary” spending has been consolidated and increased without the slightest adjustment.
Total public spending in 2023 will be 5.9 trillion. Well, in 2032, with the path presented by the Biden administration, spending will rise to 8.8 trillion. An increase of 72 billion between 2023 and 2032 for an increase in revenue of 56 billion. There is no measure to increase taxes or increase collection that can add almost 20% more to annual, consolidated and also invariable income. Revenue, by definition, is cyclical. Expenses are annual, consolidated and growing. No government can believe that it is going to collect more than one trillion a year forever. Additionally, that would only reduce the deficit, not the debt, which already exceeds 100% of GDP.
The United States can have superior debt only if the world market perceives that its capacity for growth, employment, investment and attraction of global capital remains intact. To do this, you must reduce unnecessary expenses. Republicans are calling for discretionary spending to be brought down to the pre-pandemic level, from $1.7 trillion to $1.4 trillion, and not grow more than 1% a year each year. This measure is important because both Republicans and Democrats know that mandatory spending is going to grow with the changing demographics of the country. Therefore, containing discretionary spending is key to maintaining the stability of the dollar and the credibility of the US bond.
A reduction of 425,000 million annual spending is not the solution, but it would ensure that the US debt would be slightly below 95% of GDP if the growth scenario described above is fulfilled. There is no doubt that spending will have to be reviewed, in any case, with new adjustments if there is a contraction in income.
Those who say that the public sector of the United States can spend whatever it wants and only has to print dollars and monetize the debt ignore that the stability of the dollar and its world demand are maintained precisely because the government is limited in its zeal to waste budgets.. Neither the Federal Reserve can afford an annual deficit of more than a trillion dollars nor would the world’s investors and central banks, which have the US bond as reserves on their balance sheets, accept it. It is easy to think that the United States can increase its imbalances forever without anything happening, because it is a myopic analysis focused on a very short period of its history, the last twenty years. The demand for a currency, and with it that of the country’s bond, is not infinite and neither is the patience of central banks and world investors. The collapse will not come from reducing the budget by 425,000 million a year, as the statist narrative tries to sell us. ANDhe collapse of the US would come when the world stops accepting its currency because the public accounts are unsustainable. The Federal Reserve is the only central bank that pays attention to global demand for dollars, and it knows that if it goes too far in increasing the money supply above real demand, it will not only trigger inflation, as it has already done, but that confidence in the US bond will sink.
America’s problem is not raising the debt ceiling. The country’s problem is to increase it while maintaining global confidence that spending and the deficit will not run wild again.
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