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At what point will the national debt be unsustainable?

At what point will the national debt be unsustainable?

Business

The US debt (and the deficit) is starting to get more attention in the media.

In today’s online The New York Times, the first three headlines:

“Debt Default Would Cripple U.S. Economy, New Analysis Warns”
“A Freshman Republican in Oklahoma Makes the Case for Big Spending Cuts”
“President Biden’s new budget plan will propose tax increases on the wealthy to help keep Medicare solvent.”

As I have noted for some time, US fiscal policy is “unsustainable”!

Actually, that’s not my word–that’s the conclusion of the U.S. Department of the Treasury.

We seem to have hit a wall, where massive fiscal stimulus has kept us out of a recession, but has been more than required for quite some time to the point where it has ignited inflation. Which, in turn, has forced the Fed off of ZIRP into a rapid rise in rates to battle inflation. Which, in turn makes the deficit grow even faster.

Too much fiscal stimulus has resulted in the usual doom loop that it always does, and Congress leaves the Fed holding the bag.

How does this end? The NYT headlines are instructive.
We are going to have tax increases
We are going to have spending cuts
And we are going to live with inflation for an extended period of time
It was ever thus….

This is the price we pay for trillions of dollars in untargeted spending.
“You can pay me now, or you can pay me later.”

This mismanagement of the US economy hurts those it purports to help: the poor and the working class. They are the ones who suffer when their wages don’t keep up with the cost of living, and when the value of their savings is degraded.

What would be a better system?

  • Constitutional amendment for a balanced budget: no borrowing for consumption unless in time of national crisis, and limited to a capped percentage of GDP over a fixed period of time. Germany provides an example
  • Remove the growth mandate for the Fed and focus it just on preserving the buying power of the dollar. Thus, that would reduce the political pressure it faces, and put more pressure on Congress to be responsible.
  • No hidden taxes or hidden spending. Full transparency to improve Congressional accountability
  • Of course, a new tax code would be a big help to support more balanced growth.

What am I missing?

Written by Perry Boyle

Perry helped lead Point72’s launch as a registered investment advisor, raising over $6.8bn in external capital. He originally joined S.A.C. Capital Advisors in 2004 as the firm’s first Director of Research. In January 2013 he became Head of Equities and, in January 2015, he became Head of Discretionary Investing at Point72. From June 2016 through December 2017 in addition served as the President and Chief Investment Officer of Stamford Harbor Capital, L.P., a company owned by Steven A. Cohen. He returned to Point72 in January 2018.

In his various leadership roles at the firm, Mr. Boyle managed the Long/Short and Macro PMs.

Moreover, he created and led the firm’s professional development programs, including P72 Academy and the 9s Program, and helped drive the Internationalization of the firm, overseeing offices in London, Hong Kong, Tokyo and Singapore.

Prior to joining S.A.C., Mr. Boyle was a Founding Partner of Thomas Weisel Partners, and a Managing Director at Alex. Brown & Sons. He began his career as an investment banker with Salomon Brothers Inc.

Mr. Boyle received his A.B. in Economics from Stanford University and his M.B.A. from Dartmouth College and he is pursuing a masters degree at the Fletcher School at Tufts University. Additionally, he has lectured on investing at Brown, Yale, Dartmouth, Harvard, Cambridge and UNC, and delivered testimony to Congress on financial regulation.

Mr. Boyle is a member of the Advisory Board of the Center for a New American Security (CNAS), and a Director of The US Friends of the International Institute for Strategic Studies (IISS). In addition, he was a 2018 and 2019 delegate from the IISS to the Shangri-La Dialogue in Singapore. Furthermore, he is a Council Member of the Hoover Institution and a Lionel Curtis member of Chatham House. Lastly, Mr. Boyle helps lead the annual Ride For Our Vets, the major source of funding for the Connecticut Veterans Legal Center.

At what point will the national debt be unsustainable?