2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff heard former Assistant Treasury Secretary and Harvard President Larry Summers on the radio night before last discussing inflation and the federal government’s fiscal outlook.
Summers cited a Congressional Budget Office Report that forecasts a federal debt-to-GDP ratio of 140% within a decade, up from the current 120.7%.
This ties in to the Economics Correspondent’s depressing article last week outlining how growth and inflation will allow the Treasury to easily run $1 trillion deficits every year forever without raising the debt-to-GDP ratio, and calculations that even $1.8 trillion deficits for the next decade would result in no change to the debt-to-GDP ratio remaining at 120.7%.
Well it’s even worse than that. A hike to 140% of GDP means even bigger forecasted deficits.
The Correspondent hasn’t read the CBO report but let’s go with some conservative assumptions: an average of 2% annualized real GDP growth and 2% inflation over the next decade.
Compounding 2% real GDP growth plus a 2% increase in prices over ten years means current GDP of $26.1 trillion will grow to a nominal $38.8 trillion.
(1.02^10)x(1.02^10)x$26.1 trillion = $38.8 trillion
Since the CBO predicts the debt-to-GDP ratio will rise to 140%, that means the national debt will be $54.3 trillion by 2033.
Today the debt is $31.5 trillion.
Therefore the CBO predicts the debt will grow by $22.8 trillion over ten years.
That’s an average of $2.28 trillion annual deficits we can look forward to, much higher than the $1 trillion the Correspondent argued was easily sustainable.
Right now the projection for 2023 is a $1.4 trillion deficit. But of course as GDP grows over time future Congresses and presidents will run much higher than $1.4 trillion shortfalls to reflect higher nominal GDP—probably well north of $2 trillion by the time 2033 arrives.
And of course if there’s a recession or two in between, falling tax revenues and higher government spending—much higher if Washington is controlled by Democrats who believe in Keynesian economic theories and massive deficit spending to “promote recovery”—will raise the thin years deficits well above $2 trillion.
And the best part is Summers predicts 140% of GDP is too low and that America is on course for a debt-to-GDP ratio of 150% by 2033.
That's a national debt of $58.2 trillion by 2033 and average annual deficits of $2.67 trillion.
Enjoy folks. Inflation, the loss of your money’s purchasing power, finances a great deal of Uncle Sam’s ability to borrow and spend like this, and they’re still not happy leaving the debt alone at 120% of GDP. They’re on course to raise it to 140% or 150%.