Macro Trends/Forecasts

Jeff Miller

"The Man Who Called Dow 20,000" --CNBC

Should We Worry About Mounting Debt?

Debt levels command widespread and growing concern.  While I am not troubled by individual and corporate debt (stories for another day) government debt is another matter.  My generation is engaged in a massive transfer of wealth and obligations to younger folks.  Poverty used to be a problem of the elderly.  Now it is centered among children.

Spending is out of control.

  • Some social service programs generate long-term commitments without known costs.
  • Federal budgets -- when we actually get one -- are never balanced in current terms, and now not even balanced with optimistic revenue projections.
  • State budgets, despite a requirement to be balanced by many state constitutions, have also used creative techniques to avoid the requirements.

Efforts to control spending are often misguided.

  • Cuts in government employees, especially at the Federal level, are deceptive.  Oftentimes the services are then shifted to a (more expensive) outside consultant.
  • Cuts at the state and local level show up in key services -- first responders, teachers, child services, and similar areas.  It is easy to think that having a smaller number of such workers does no harm, and difficult to measure specific consequences.
  • Maintenance is neglected.  Failing to fix things is expensive.

Why does this happen?  When I taught the courses in budgeting and public finance, I posed a question for students.  Suppose all existing tax and spending laws were eliminated.  Could we then build a balanced budget?  My proposition was that it would only be a matter of time before we were back to the current state.

A long-standing and unusual fact:  People hate Congress as an institution, but generally like their own representative.  Representatives deliver services through spending and please constituents with tax cuts.  These are powerful incentives to stretch a bit on both sides.  Oftentimes this is masked by optimistic estimates of revenue or claims about cutting wasteful spending.

Please note that this is not a partisan political statement.  I am not asserting specific responsibility for blame.  It is a systemic problem. I

Those interested in the policy question will appreciate the analysis by The Committee for a Responsible Budget.  Here are a few surprising observations.

Investment conclusion

And finally the big question for us: Is this a relevant concern for investors?

Typically we see comments about debt from those who add it to the litany of market worries.  It will all end badly, so it is a reason to be bearish.  And without any policy changes, it will end badly.

But that is an issue for citizens.  Take it up in your civic actions and private influence.

As an investor, the short-run consequences are mostly positive.  We'll see some additional economic stimulus.  It also shows the nascent ability for some bipartisan action.  And especially, it avoids another crippling fight over the debt ceiling.

So as a citizen I hold my nose.  As an investor, I see a small positive.

Jeff Miller provides Economic Analysis as well as Market Forecasts as one of the original contributing analysts at FATRADER. A quantitative modeling expert and former university professor who is the #1 Economics contributor at Seeking Alpha, Jeff is regarded as an expert on economics, market reaction to news events, and computer-based trading.
Sign Up Now - Free 15-Day Trial! Go! Fatty!