Debt-to-GDP Ratio Projected To Double in 20 Years

In Forecasts & Trends on Tuesday, I made the case that our national debt should include both Debt Held by the Public and Intragovernmental Debt. I argued that Intragovernmental Debt is just as much a liability as Debt Held by the Public, and by all means should be included when calculating our national debt. Together, those bring our national debt to a record $21.7 trillion.

It also takes our Debt-to-GDP Ratio to a whopping 105% as of the end of the 3Q. I explained to readers how the government and the media like to report only the Debt Held by the Public when discussing our national debt.

Such is the case with the latest debt projections from the Congressional Budget Office (CBO). The CBO is required, among other things, to regularly provide 10-year and longer budget deficit projections. We can also use these budget deficit estimates to track where the national debt is headed.

The latest CBO projections show our Debt-to-GDP Ratio exploding to over 148% in 20 years. Here again, that 148% figure only includes Debt Held by the Public and does not include Intragovernmental Debt. That’s how the government does it. So, how high do you think our Debt-to-GDP Ratio goes if we add Intragovernmental Debt? Take a guess…

… If we include Debt Held by the Public and Intragovernmental Debt, our Debt-to-GDP Ratio explodes to a mind-boggling 207% by 2038! And it’s likely to be much worse because the CBO used some economic assumptions that are way too optimistic. I’ll give you two examples of these unlikely assumptions:

*   There are no recessions between now and 2038.

*   President Trump’s tax cuts continue through 2038.

If we don’t have a recession before the end of 2038, that will mean 30 years without one – which has never happened in the Modern Era. As for President Trump’s tax cuts lasting to 2038, the odds are zero, especially if the Democrats take over Washington after the 2020 elections. If they do, those tax cuts are almost certainly gone in early 2021 (if not even sooner).

The point is, even with these unlikely assumptions, the Debt-to-GDP Ratio almost doubles over the next 20 years, according to the CBO’s latest projections. In reality, it could be much worse!

You might be wondering at this point how many countries have a Debt-to-GDP Ratio equal to or higher than our 105%. Japan leads the world at 236% followed by Greece at 182%, followed by Lebanon, Yemen, Sudan, Portugal, Barbados and Congo. What good company to be in! Imagine where these countries will be in 20 years.

The real question is not whether the politicians in Washington would spend that much over the next 20 years. They would if they could. The real question is whether the financial markets would stand for it? Many analysts, including yours truly, believe the bond market would blow up long before we reached a Debt-to-GDP Ratio of 200+%. Interest rates would skyrocket!

The equally important question is: Who’s going to buy all that debt? I can’t imagine that the largest holders of our debt – currently China and Japan – would continue to buy US Treasury securities if the Debt-to-GDP Ratio was to explode as discussed above. Those two each own more than $1 trillion in US government debt.

In fact, I doubt that any foreign governments would continue to finance our debt in that scenario. Combined, foreign governments own apprx. $6.3 trillion, or 29%, of our debt. Thus, we could be looking at a financial crisis of epic proportion.

For this reason alone, I will tell you that I do not believe we are going to see our Debt-to-GDP Ratio almost double from 105% to 207+% over the next 20 years. While our politicians – on both sides, mind you – might be willing to risk it, I don’t believe the markets will stand for it. If they do…

I believe interest rates would spike, inflation would spike, consumer confidence would plunge and we could see the worst financial crisis since the Great Depression, or worse.

Yet in the spirit of full disclosure, I would have said the same thing 20 years ago, and probably did. In 1998, our national debt was $5.52 trillion. Today it stands at $21.7 trillion. So it almost quadrupled in the last 20 years!

Worst of all, this has happened under Democrats and Republicans. While the Dems and the GOP are today the most divisive – they seem to genuinely hate each other – as I have ever seen them, they are sadly united on one issue: the government has to spend more every year.

They’re on-track to increase the annual budget deficit by over $1 trillion a year over the next 10 years, according to the CBO. Yet they have to know this will end very badly at some point.

Yet we keep re-electing them year after year. So, at the end of the day, who is really to blame – them or us? Think about it.