Federal Debt Will Be Double Our Economic Output By 2040
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The US government has spent $830 billion more than it has earned so far in 2024. For context, in 2016 the US federal budget deficit for the whole year was $587 billion—so, in the first quarter of 2024, we have already surpassed the entire year's federal deficit and we still have 6 months left in the fiscal year.
Here's a chart to illustrate the runaway nature of government spending compared to government revenues. This is the federal deficit in February since 1999—the spending problem is worse now than it was during real crisis periods like the 2008 Great Financial Crisis and the government-induced COVID lockdowns:
Why is this happening?
Debt is becoming incrementally less effective at supporting the US economy. More units of government debt are required to support the same level of economic activity and growth.
Fiscal spending has risen at an average rate of 4.5% every year since 2014, while government revenue has only risen 3.8%. This means the US' fiscal deficit is rising, but the growth of GDP is still ~2% every year. Measuring the deficit against GDP lets us see our deficit in relation to our ability to finance it, and it is clear that our ability to finance it is waning.
Now at 6.4% of GDP, we have never had a deficit this bad outside of the aforementioned lockdowns, the Great Financial Crisis, or World War II. If we weren't running this deficit, and tried to balance the budget, GDP would collapse:
Even with a strong economy, our deficit is still historically wide. Tax revenues are healthy and climbing thanks to strong wages and strong spending. Government bond issuance is doing well too. By all accounts, revenue is healthy. The problem comes entirely from the spending side, which is getting out of control.
In February, we collected $271 billion and spent more than double that at $567 billion. $224 billion went to social security, medicare, and veterans benefits, while the remaining $343 billion went to military spending and interest on the debt. Even with bond revenue up and tax receipts at very high levels as the economy surges in nominal terms, the interest expense alone completely swallows it. We are on track for a $2 trillion cumulative deficit this fiscal year, or 4x the size of 2016's fiscal year deficit.
Look at how much US economic "growth" has detached from reality.
The federal budget has moved in an inverse lockstep with the unemployment rate historically. When the government runs a big deficit, it is usually to stimulate an economy that is down in the dumps. This relationship has changed for the worse. We are now stimulating the crap out of the economy while the unemployment rate is at historical lows. Our current 6.4% budget deficit implies that the unemployment rate would be at 8% instead of the 3.8% we have right now if the fiscal spending was removed from the equation.
Debt has become less effective, and more of it is needed to achieve the same economic outcomes as before:
Spending can't slow down to fix this. Are we going to stop social security, medicare, and veterans benefits? Not if politicians want to get reelected. Are we going to stop interest payments on our debt? No. The US can't and won't default on its marketable debt. The path forward is to continue this unsustainable trend of debt growth outpacing economic growth.
The projections from Congress have federal debt 2-times higher than our economic output by 2050, with the debt-to-GDP ratio hitting 200%. Using the rate of change from the past decade and extrapolating forward, I think we'll get there by 2040 at the very latest, maybe sooner:
The Federal Reserve has already forecasted interest rate cuts in June. These cuts are not in response to a slowing economy or stress in funding markets, at least I don't think so, since neither has become apparent yet. They are instead in response to the federal debt interest expense surpassing $1 trillion annually.
Cutting rates will make the interest expense more manageable for the government, and will maintain the illusion of economic prosperity even as CPI inflation runs hotter than GDP. As per usual, the buck gets passed off to you, and your children, to deal with in the form of pillaged savings.
Final thought: the ship is sinking, but we have the benefit of foresight. Don't be the last one onto a liferaft. They are getting more expensive by the day.
Take it easy,
Joe Consorti
Theya is an app for simplified Bitcoin self-custody. With our Modular Multisig solution for self-custody, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store and secure your bitcoin with ease.