Executive Summary
In case you missed it, President Trump established the Department of Government Efficiency or DOGE. Politics aside, something must be done about government spending. Currently our U.S. National debt is over $36.5 trillion dollars, while the annual budget deficit last year was $1.8 trillion. Studies show that when debt to GDP exceeds 90% for five years, economic growth falls roughly 30% from its long-term trend. The U.S. has attempted to counter this drop with government spending (the $1.8 trillion deficit). However, now the challenge is servicing the debt. The average interest rate on outstanding Treasuries is around 4.37%. Debt service is now a burden, and spending needs to be slashed.
For further analysis, continue to read The Details below for more information.
“If you buy what you don’t need, you steal from yourself.”
–Swedish Proverb
The Details
In case you missed it, President Trump established the Department of Government Efficiency or DOGE. Its stated purpose is to root out and eliminate waste, fraud and abuse in government spending. Of course, this has created conflict among those who derive some benefit from activities now on the chopping block. It appears clear that despite the political posturing, the U.S. is spiraling into fiscal disaster. The national debt has skyrocketed to $36.5 trillion. And even in “good times” the annual fiscal deficit was $1.8 trillion last fiscal year.
The problem, in a nutshell, is the debt has been growing much faster than the economy. The graph below, created using the St. Louis Fed FRED database, compares the growth of the national debt (red line) to the growth in the economy (blue line) from January 1, 2000, through the third quarter 2024. Notice the widening of the graph beginning after the Financial Crisis in 2008, and then even further after the pandemic in 2020.
To add some perspective, from 2000 through 2007, just prior to the Financial Crisis, it took $1.27 of debt to produce $1 of economic growth. Since then, from 2008 to September 30, 2024, the amount of debt required to generate $1 of economic growth soared to $3.10. An economy in which debt grows faster than GDP is unsustainable. The U.S. is on that path and if something – like DOGE – isn’t done soon, it will have serious consequences for not only our economy but for global growth and the future of the dollar as the reserve currency.
In 1980, the debt to GDP ratio was about 35%. By 2000, it had jumped to 59%, and now it is a whopping 123%. Econometric studies have shown that when this ratio exceeds 90% for five years, economic growth falls roughly 30% from its long-term trend. The U.S. has been in this situation since 2010. In order to prop-up growth, government spending has rocketed higher. This spiral is not sustainable.
The rise in interest rates has increased the cost of servicing the ever-growing debt. Currently, the average interest rate on outstanding Treasuries is about 4.37% according to fiscaldata.Treasury.gov. Since debt is constantly increasing, as existing debt matures, it must be refinanced at current rates. This situation is why the Fed wants to lower interest rates. The problem is the Fed only controls the short-term Fed Funds rate. For the first time in history, the Fed lowered the Fed Funds rate by 1% during 2024, and the 10-year Treasury Note yield rose by about 1%. (see area circled in yellow on graph)
According to an article on CNBC.com, there are about $3 trillion in Treasuries maturing in 2025. That means new securities will have to be issued at current rates. The total interest expense on outstanding debt is over $1 trillion per year. This amount exceeds the defense budget.
The debt service has become such a burden that the U.S. has to borrow money to service the growing debt balance. The fiscal crisis is real and must be dealt with immediately in order to avoid catastrophe. Whether DOGE or something else, spending must be slashed significantly.
The S&P 500 Index closed at 6,026, down 0.2% for the week. The yield on the 10-year Treasury Note fell to 4.49%. Oil prices decreased to $71 per barrel, and the national average price of gasoline according to AAA rose to $3.14 per gallon.
© 2024. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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