The Debt Clock is Ticking
Issue XLVI
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Today’s Bullets:
What is the Debt Clock?
Back in Time
Back to the Future
Implications for Today
Inspirational Tweet:
After posting this Tweet last week, I received a number of questions about the data and its implications. In short, with so many figures being displayed, how exactly does the Debt Clock predict that the Fed and Treasury will (or may already) be at odds with each other?
Let’s break it down, quickly and simply as always, shall we?
⏰ What is the Debt Clock?
Some of you are old enough to remember back in 1989, when real estate investor Seymour Durst had this version of the debt clock installed on 42nd Street and Sixth Avenue in New York City.
I remember being astounded by the numbers, even a little concerned, though I was still a teenager.
Some say this shock value worked. It woke up the average person to the growing debt problem.
But did it really?
Because, flash forward to today, and we all know the situation has only gotten worse. Far far worse.
Perhaps the numbers are just too large to grasp, too intangible for the average person to digest, even with the per family share displayed right alongside the total tally. Or perhaps people just feel helpless. The government will do whatever it wants, regardless of who we elect. Regardless of what we request, what we demand.
Either way, the national debt implications are quickly going from highly concerning to outright ominous.
And now, with the advent of the Internet and smartphones, we can just pull up a web page or open an app on our smartphone and we have this running total and much much more, right at our fingertips.
As most of you know, the latest version of the debt clock (run anonymously at usdebtclock.org) looks like this:
*A quick note: if you click on any of the numbers or boxes, a dialogue box pops open at the top, explaining the figure and its source. These numbers are generated to scroll higher or lower according to the credible sources and are periodically adjusted in large sums due to budget changes (i.e., a large spending bill being passed, or tax code changes, etc.).
This is a mass of numbers and information, so let’s focus in on some of the most important and telling ones today.
First, if we zoom in on the upper left corner, we can see the total US National Debt, as reported by the Congressional Budget Office (CBO).
For those of you who are far removed from the world of finance and government workings, this is basically all the money that the US has borrowed from its people, companies, other governments, and other countries’ people.
It represents all the US Treasuries outstanding and added up, that will need to be paid back at some point. After all, they are just bonds. Albeit a monumental pile of them.
$31.473 trillion to be exact.
And this works out to be ~$94K of debt per citizen or $247K per taxpayer.
We can also see just below these numbers that the official US Federal Spending, as reported by the CBO, is just under $6T annually, making the official annual shortfall (the US Federal Budget Deficit) $1.31T.
This is the amount of new debt the US Treasury must issue in order to fund the budget and pay off previous, maturing debt.
Below these, and slightly grayed out, we see actual figures. These include what are deemed off-budget totals to get a closer approximation of what the government will actually spend, as opposed to what the CBO reports spending.
Moving on.
Zooming into the upper right side of the clock…
…we see the US Federal Tax Revenue total, $4.67T. To the right of this box, you see the breakdown of this total, which is made up of Income Tax Revenues, Payroll Taxes, Corporate Taxes, and Tariffs, which all add up to that $4.67T total.
Taxes, of course, are simply a function of the total US Gross Domestic Product (GDP), listed on the bottom left of that box, totaling $25.9T.
Remember, the higher the GDP, the higher the tax revenues, and vice versa. Of course, it is a bit more complicated than that, but in essence—and for the purposes of today—just know these are highly correlated.
So, unless the government somehow spends less (hahahahahahahaha 🤡), then:
The higher the GDP, the higher the taxes, the lower the deficit.
The lower the GDP, the lower the taxes, the higher the deficit.
Peek back to the left hand side and we see the Debt to GDP number and how it has fluctuated from:
53% in 1960 → 34% in 1980 → 59% in 2000 → 121% today.
Whoa.
Now there are a whole lot more numbers on here, and some super interesting ones, like workforce and income numbers, as well as student loan debt, credit card debt, and personal debt per citizen.
But I would like to direct your attention to two more key numbers that are on this page.
First, in the middle left box, we see the Largest Budget Items broken into categories. These are where the US Government is spending the most annually. The largest pieces of that $4.67T of total spending, here’s $4.15T of it:
You may have heard me speak about this recently, or seen the Informationist Newsletter detailing what we call a debt spiral, and showing how the US has already entered one. If you have not read that yet, you can find it here:
TL;DR: Because the US Government spends far more than it makes, it has to keep borrowing, and with interest rates rising this past year, the spending deficit has only widened with higher interest expense, making the matters worse.
Another not-so-unimportant-but-so-big-it-blows-the-mind number I’d like you to note is the one all the way down at the bottom, labeled US Unfunded Liabilities. This is all the money the US Government owes on top of the US Federal Debt.
You read that right. The US Government owes another $173T to pay off various programs, like Medicare and Social Security.
That makes $204T (yes, Trillion dollars) that the US Government currently owes people.
The we are so screwed moment.
And now, a moment of silence for the US Treasury, please.
More on that, but first, let’s slip back in time to see where we’ve come from. Then we can talk about where we are going.
🫥 Back in Time
One neat little feature of the Debt Clock (located on the upper right hand side) is the ability to enter a Time Machine of sorts. And sending the clock back to this day in 1980, we can see a few interesting data points.
First, the US National Debt was only $855 billion in 1980. Some quick math tells us that this number has grown ~37X since then. And, no surprise, the US Federal Budget Deficit has done pretty much the same. Also up ~37X.
Yet, GDP is only up 11x. And hence, US Federal Tax Revenues are only up ~10X.
Oops.
It is therefore no surprise that the Federal Debt to GDP ratio has ballooned from 35% in 1980 to 121% today.
Impressive.
This of course leads us to ask, is this it? Is this as bad as it is going to get?
Surely we will have another fluctuation that leads us to close the spending gap, right?
Surely we can’t keep going like this. Borrowing ad nauseam.
Can we?
Well, let’s peer into the near future and see…
😵💫 Back to the Future
Once again, using the CBO’s own projections (ones that are mightily optimistic, I may add, having done a few calculations myself), we see that the situation does not, in fact, get any better.
By the year 2027, the CBO itself projects a deficit of $1.8T, a jump of about 40%, and the National Debt growing to an eye-watering $44T.
In just four more years!
Add in the $220T of Unfunded Liabilities, and whammo.
Houston…we have a problem.
🫣 Implications for Today
So, what exactly does this have to do with the US Fed being at odds with the US Treasury?
Well, if you’ve been following people like me, Greg Foss, Larry Lepard, or Luke Groman, you’ve heard us talking about the Fed causing growing deficits and the precarious position in which the US finds itself today.
In short, inflation has been raging, and the Fed has been raising interest rates and draining money (M2) from the system via quantitative tightening to counter the rise in prices.
This has the effect of a few major impacts to the numbers on the Debt Clock.
First, rising rates and tighter money supply means that companies will be less profitable. This leads to lower Corporate Tax Revenues, as well as lower valuations in the stock market, and so, lower capital gains and hence, lower Income Tax Revenues.
Exactly. GDP contracts, and the US Treasury collects less in tax revenues.
This means, without Congress lowering or slashing budget items, the Federal Deficit grows. The US Treasury must then borrow even more money.
But wait. There’s more.
Add higher interest rates to the US Treasuries being auctioned in order to fund this growing deficit and the Interest On Debt number rises, causing the deficit gap to widen even more.
The dreaded Debt Spiral.
So, at some point here in the near future, the Fed will need to stop raising interest rates.
The US Treasury will more or less demand they do. After all, erring on allowing a little higher inflation helps the Treasury inflate away all this accumulated debt.
If the Fed doesn’t stop raising, at best, the spending gap widens, the debt balloons further, debt to GDP increases, and the US Treasuries become a more risky investment. (To note: there’s no such thing as ‘risk-less’).
At worst, the Fed plunges the US economy into a dumpster fire, and a full on recession or even depression.
In this case, GDP collapses, tax receipts evaporate, the deficits gaps even wider, and entitlement spending skyrockets (think massive unemployment benefits), all exacerbating the issue.
And then?
The money printer is plugged back in, and we get what we call QE Infinity.
The Fed prints so much money, that eyeballs bleed.
One more cycle of this, and The US Treasury could very well lose its highly coveted status as the global reserve asset.
So hold on tight, everyone, and be selective when adding to risk assets during this uncertainty. As for me, I’m still adding exposures to hard monies like gold, silver, and Bitcoin, and I am holding a large percentage of my assets in cash for opportunistic investing.
Because I personally believe the Fed is going to push us right to the edge. And then, in a showdown worthy of a scene in Butch Cassidy and the Sundance Kid, the Fed and Treasury have a public duel in the town square. The Treasury draws fast and wins this round.
But eventually…we all lose.
That’s it. I hope you feel a little bit smarter knowing about the Debt Clock, and feel you can use it to follow the growing debt problem we have in the US and other countries.
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✌️Talk soon,
James