Federal Debt Downgrade Highlights US Government Fiscal Problems
US Debt has been downgraded from AAA to AA+ by Fitch. While credit risk is probably quite low, interest rates and inflation risk are going to become more apparent over the next decade.
– The CBO (Congressional Budget Office) estimates that the deficit for FY23 will be $1.4 Trillion, ballooning to $2.8 Trillion by 2033. Estimated FY23 expenses of of $6.2 Trillion but only $4.8 Trillion of revenues.
– The gross debt issued will outpace the size of the economy, growing to $34 Trillion this year. CBO forecasts this will expand to $55 Trillion by 2033. The current size of the US economy is only $26.8 Trillion.
– Relief programs following the Great Recession in 2008 and the COVID-19 crises in 2020 were largely financed by the Federal Reserve (The Fed) buying Treasuries, ballooning its balance sheet to just shy of $9 trillion.
– The Fed estimates it will trim $1 trillion per year off the balance sheet. However, global central banks are doing the same with US treasury bonds. There is a tsunami of debt issuance coming and few buyers of the debt combined with numerous sellers. Central Banks are not only selling treasuries they are buying gold.
– Social security and Medicare expense will continue to goose government spending and deficits. These entitlements are expected to grow to $4.2 Trillion as almost 1/3 of the US population reaches retirement age.
-Bond issuance tsunami could create higher interest rates, squeeze out private borrowers, and create a need for the Fed to pivot back to QE (Quantitative Easing). What will more QE do to inflation, interest rates, the economy and financial markets?
-Staying cautious with less stocks, more cash or money markets, avoiding long-term bonds, and owning gold.