The government’s red ink raises concerns about a prolonged economic recession and market troubles
Rising debt and deficits are threatening to make the next recession deeper, according to two leading economists, while tying the hands of policymakers. The Congressional Budget Office this week revised its estimates to paint an even bleaker version of the U.S. fiscal picture. In the updated view, the budget deficit is projected to be about $2 trillion in 2024, rising to $2.8 trillion over 10 years. During this time, it will sometimes be close to 7% of gross domestic product, or nearly double the trend over the past 50 years. When that happens, total public debt held by the public is expected to reach a record 122% of gross domestic product, higher than post-World War II levels and easily surpassing levels in 2020 when the government The government poured trillions of dollars into the economy. economy to cope with the Covid pandemic. Economist David Rosenberg said the cumulative effects would make it harder for both fiscal and monetary authorities to maneuver, threatening the long-term economic picture. “The deficit this fiscal year is at an alarming 7% of GDP, higher than we have seen in recessions,” Rosenberg, founder of Rosenberg Research, said in a daily report Thursday. before”. “The fact that we can have this kind of fiscal expansion but at the same time have this weak pace of economic activity is a shock but now highlights that everything has limits – the real problem is how the government will handle it.” “can withstand the next recession with severely limited financial manoeuvres,” he added. In fact, Rosenberg believes the economy is near or in the midst of a recession. He noted that more than a third of initial economic figures are being revised lower know that the three-month average increase of half a percentage point in unemployment over the past year is consistent with a recession. The situation is further complicated by the inflation that has accompanied fiscal and monetary expansion strongly over the past four years. Although the inflation rate has dropped significantly from its peak in mid-2022, Federal Reserve officials insist the rate is still too high and they are not ready to lower interest rates. rate of its fiscal revisions, CBO noted that the increase in debt and deficit was due to “increased spending on programs that benefit the elderly and higher net interest costs.” The government in fiscal 2024 spent $601 billion on net interest – the difference between what it paid in financing costs versus what it received in investments – and the total exceeded spending on both health and defense. Worries about ‘tipping point’ To be sure, the US economy has avoided persistent concerns about an impending recession, as consumers are still spending, albeit at a slower pace, while the economy The economy continues to create jobs. Treasury Secretary Janet Yellen recently said in an interview with CNBC that the US debt burden, now at $34.7 trillion, is at “a reasonable level” as long as the economy continues to grow. . But Rosenberg is not the only one sounding the alarm about America’s financial situation. Former White House economist Joseph LaVorgna noted that the CBO’s grim picture could get worse because its economic forecasts are “too optimistic” and don’t take into account the possibility of a 10-year recession. next. “If there is a recession, the unemployment rate will go much higher and increase,” said LaVorgna, chief economist at SMBC Nikko Securities and a former member of the National Economic Council under former President Donald Trump. Revenue growth will decline. “With a historically high budget deficit compared to an economy operating at full employment, the government could face double-digit budget deficits when the next recession hits.” While the stock market has largely brushed off worries about the financial situation, LaVorgna and Rosenberg both emphasized that bond investors should pay attention. For example, LaVorgna reiterated long-standing — and as yet unrealized — worries that deteriorating financials could lead to a revolt in the fixed-income space, driving up borrowing costs. higher and exacerbate debt and deficit problems. “The economy and financial markets may be closer to this tipping point than some investors realize,” he wrote. “Whatever happens, CBO’s latest projections show a long-term fiscal outlook that we consider very worrying and unsustainable. Bond investors should start taking note.”
