Ever since the US national debt crossed the psychological $20 trillion barrier, Americans have become more and more concerned about their future. And the latest headline regarding this issue, has only increased these worries. The nonpartisan CBO (Congressional Budget Office) has reported that America is well on course to top a $1 trillion budget deficit per year by 2020. In 2018, CBO says that the budget deficit will hit $804 billion, representing a 21% rise from 2017 levels.
Federal Government Deficit
Granted, it will not be the first time the federal government deficit hits $1 trillion a year – in fact, America ran annual deficits of over $1 trillion every year from 2009 to 2012. But unlike that period (just after the global financial crisis), when the US government ran an aggressive economic stimulus program as well as increased social safety net spending, the current deficit increases come when unemployment is at record lows and the economy is witnessing steady growth. It is this timing that is scaring economists and should concern every American.
There is always a case for budget deficits in times of recession, as they help in stimulating the economy. On the other hand, in times of full employment and overall good economic growth (as we are now), the general wisdom is to reduce federal deficits. But instead of repairing the roof during sunshine, the US government is perforating the fiscal roof even more. But how did we get here?
The explanation is rather straightforward; increased government spending and reduced revenues. The situation is getting direr as Trump and the Republican congress passed a new tax law in the last quarter of 2017. The law, among other measures, cut corporate taxes from 35% to 21%, with the expectation that this move will spur economic growth and limit, or even eliminate, any additions to the deficit. But the CBO report estimated that the law would only boost economic growth by 0.7% over a decade. During the same period (2018-2028), CBO estimates that the law would cut government revenue by $1.3 trillion, and when costs of servicing the debt are included, the overall contribution of the law to the federal government deficit would top $1.9 trillion. Another major reason for the rising US wage debt has been an aging population.
Currently, the number of people over the age of 50 has more than doubled in fifty years, and that number can only increase. This comes with spending obligations, such as Medicare, Medicaid and social security payouts. The shrinking working population will now be supporting older Americans, and there is only so much tax they can pay. This means that the threat of a debt-inspired financial crisis is more than imminent.
The Effects of Growing US Debt to Economy and Financial Markets
Debt, especially growing debt, must always be a worry. Logically, the chances of an economic crisis rise when debt becomes bigger. In the US, there should be even more concern as we are entering uncharted pathways; the debt levels currently equal the size of the entire economy, and if it worsens, as it is predicted, the impact on the economy can be catastrophic.
In the short term, higher debt will discourage investment as investors anticipate slow economic growth. This will have ripple effects that will trickle down to the American populace. There will be slower wage growth, but higher interest rates on almost everything from mortgage loans to credit card loans. This will significantly increase the cost of living for Americans.
Higher debt also means higher debt servicing payments. In fact, CBO estimates that in 10 years, interest costs will more than triple, and that 100% of US revenue will go to mandatory spending and debt servicing. This will limit infrastructural spending and other key expenditure that can spur economic growth.
Additionally, higher debt also reduces fiscal flexibility. When the US government last ran $1 trillion deficits, it was to help alleviate the consequences of the Great Recession. With the current huge debt, the US simply cannot afford a recession as it has less space to react to any huge economic crisis. A financial crisis now will no doubt be very devastating.
The US Debt and the Financial Markets
For the financial markets, the current debt headlines only heighten anxiety and uncertainty. Markets do not enjoy such state of affairs, and volatility will be the result, as it has been for almost all of 2018. The stock market will be the hardest hit, as a higher interest rate regime will not only cut into corporate profits, but also discourage additional investment by companies.
The commodities market will experience an influx of investors targeting precious metals, such as gold and silver, which are considered safe havens. These metals, as well as oil, should see higher prices as investors seek to preserve their wealth.
While traditional financial markets will become inherently risky, investors who seek to profit from volatility will find CFD trading platforms very attractive. These platforms allow traders to speculate on the price movement of assets, rather than explicitly owning them.
This means volatility, which is characterized by wild price swing in either directions, will create numerous lucrative trading opportunities in virtually all financial assets. With the US debt cloud hanging persistently, CFD trading platforms should attract profit seeking investors who are wary of reducing their risk exposure in the wake of a looming financial crisis.