Uncle Sam's Debt Is Becoming Too Much to Bear

The White House recently said the national debt will grow by $9 trillion over the next decade, up from its previous forecast of $7 trillion. This means that the national debt is now expected to nearly double and reach almost 80% of GDP, which is a level not seen since World War II.

By 2019, outstanding public debt will reach $17.4 trillion or 76.5% of GDP. Mounting concerns over economic and national security will curtail any attempt by Congress to implement a second stimulus package and healthcare reform. Due to the U.S. government’s massive borrowing needs, states and the private sector fear being crowded out in debt markets.

Uncle Sam’s debt burden is also interfering with the Fed’s attempt to stimulate the economy since it prohibits the Fed from providing additional monetary stimulus. The debt has become the 800-pound gorilla in the room and it’s influencing how businesses allocate capital. For example, Fannie and Freddie, which are now part of the Treasury Department, now dominate the mortgage markets.

With more U.S. government involvement, the velocity of money–which is how quickly money changes hands–has ground to a halt. In the past, the Fed would stimulate the economy by adding reserves or lowering interest rates. Now the Fed must print money to help the U.S. government manage its budget deficits rather than help stimulate the private sector. Yields on short-term Treasury debt are close to zero but the private sector has to borrow at much higher rates. The Treasury auctions have become too large for the global market to handle.

The net result is a stagnant economy. As the dollar continues to decay, it increases the odds we’ll see stagflation like we saw in the 1970s. Even though a business recovery is underway (thanks to depleted inventories), it’s not clear when consumer spending will start to improve. That’s why I’m closely watching consumer confidence for any signs of improvement.

The Conference Board recently said that its index of consumer confidence rose to 54.1 in August up from 47.4 in July. The expectations index rose even more impressively, jumping to 73.5 in August from 63.4 in July. That’s the highest reading in close to two years.

Consumer confidence is closely tied to the jobs market. This Friday, we’ll get the important jobs report for the month of August. This could be a good report since the last report on new jobless claims showed a drop of 10,000 which is the first drop in initial claims in the past three weeks.

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