Guesstimating
On July 20th, the CBO published, “The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget”. The CBO is the government agency that determines the most likely budgetary impact of legislation. They are also the people responsible for estimating the future annual deficits or surplus and the projection of accumulated debt. The recent publication shows us how little anyone knows about how dire, or maybe not so dire, our fiscal outlook is. The purpose of the analysis, as the title suggests, was to illustrate the wide variance that could occur versus their baseline projections. In other words, what if interest rates are higher or lower than their guess, or productivity growth or six other variables assessed in the report. While their job is deduce a number of essentially impossible long-term macro estimates, the harder part is guessing what spending and taxes will look like. How can they guess what will be coming out of the D.C. sausage factory next year or five years from now?
The CBO wrote, “If current laws governing taxes and spending generally remained unchanged, the federal budget deficit would nearly double in relation to gross domestic product (GDP) over the next 30 years, driving up federal debt…In CBO’s extended baseline projections, debt held by the public rises from 98 percent of GDP in 2023 to 181 percent of GDP in 2053.” That is the baseline, but the chart below shows how far off that projection could be.
Take a look at the chart in the upper-right quadrant. That chart tells you that the difference between rates surprising to the upside vs surprising to the downside equates to a difference in the debt equivalent to roughly 100% of future GDP over the next three decades. The CBO assumes borrowing costs revert to 4% over this time period. My guess is that after decades of global money printing, debt monetization and competitive currency devaluation, that number is probably low. The chart in the upper-left quadrant shows the same wide spectrum of outcomes depending on future productivity growth. Most economists will tell you that the ability to predict productivity growth is negligible. For what it’s worth, the current trend is quite clearly to the downside.
I was also struck by this excerpt: “In CBO’s extended baseline projections, discretionary spending is smaller, and revenues are larger, on average, than they have been as a share of GDP over the past 30 years.” Why would that be? As Fitch reminded us last week, the political will toward fiscal prudence is not going in the right direction.
We are currently running massive budget deficits that are stimulating growth at a time when inflation remains problematic. The current level of excess spending is leading the economy to grow faster than its capacity. While we don’t know where rates, GDP growth or productivity will go in the future, the CBO’s baseline case takes us rapidly into unprecedented territory and there is significant risk that the baseline is optimistic. In May, the CBO estimated that our deficit in 2023 would be $1.5 Trillion, three months later, that estimate is higher by $200billion.
Problems that can be foreseen tend to be avoided. Unfortunately, as Congress becomes more politically polarized, basic governing much less solutions may be hard to come by.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
WealthVest makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made in this material, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of Tim as of the date indicated. They do not necessarily reflect the views and opinions of WealthVest and are subject to change at any time without notice. WealthVest does not have any responsibility to update this material to account for such changes. There can be no assurance that any trends discussed during this material will continue.
Statements made in this material are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed in this material, including consulting their tax, legal, accounting or other advisors about such information. WealthVest does not act for you and is not responsible for providing you with the protections afforded to its clients. This material does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by WealthVest.
Certain statements made in this material may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.
The S&P 500® is a trademark of Standard & Poor’s Financial Services, LLC and its affiliates and for certain fixed index annuity contracts is licensed for use by the insurance company producer, and the related products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or their affiliates, none of which make any representation regarding the advisability of purchasing such a product. WealthVest is not affiliated with, nor does it have a direct business relationship with Standard & Poors Financial Services, LLC.
