Time Keeps on Ticking

Let’s start this note off with a couple of definitions. A budget deficit is a flow measured over a period, typically a fiscal year. These occur when a nation spends an amount greater than the revenue it collects. In America, most of the revenue collected by the federal government is in the form of taxes. Debt is the total amount owed at a point in time. For instance, as of this writing, America’s debt level was over $39 trillion.  In the time between when it was written and now that you are reading it, the flow (budget deficit) kept adding to total debt and is now close to $40 trillion, if not over..

One leads to the other, and then the other leads to the first. Pretty clear, right?  As America continues spending more than it receives in revenue, the debt piles up. But that debt has a cost of carry: interest. As interest payments swell, it requires more debt to be added to the pile to afford the increasing outlay. According to usdebtclock.org, America has paid $1.1 trillion in interest this fiscal year; this value will grow through the end of September when the fiscal year ends.

America is not an isolated story, but we are above average. According to data from the International Monetary Fund, the average advanced economy has a debt-to-GDP ratio of 108.2%. In other words, the average debt level is 8.2% higher than the average value of output. America’s debt-to-GDP level is 125.8%. While higher than average, we are not the worst. Three other nations have higher ratios: Japan, Italy, and Greece.

Atlas believes debt levels will ultimately matter at some point. If this turns out to be true, policymakers will have to figure out ways to bring future spending more in line with revenue. Interest costs are already constraining optionality. Our nation enjoys luxuries like a large economic capacity, deep capital markets, and the advantage of the world’s primary reserve currency, but these privileges cannot escape arithmetic forever. America’s persistent deficits are compounding the growing debt level which then leads to added interest costs. This added cost crowds out other priorities like Social Security, Medicare, and defense needs. The longer our nation waits to address the issue, the more difficult and expensive the solutions become. Without a cure, we wonder if America’s economy can continue to fly like an eagle into the future.