Weekend thoughts (and not good ones!)
Two things I thought about over the weekend are former PM Liz Truss, since she has decided to publicly defend her short time as Prime Minister, and discussions regarding the US debt ceiling, which go on and on and on…….
These are not really related although both have a common denominator grounded in fiscal irresponsibility. And before you ask if my life is so dull that all I have to do on the weekend is think about Liz Truss and the US debt ceiling, have no fear – I just couldn’t avoid either because they kept coming up in the news. I thought I’d provide my two cents on both as we start the week.
Liz Truss defends her legacy
Any way you slice it, Ms Truss’ 49 day tenure as PM was a disaster. Recall that she and her team, including Chancellor of the Exchequer Kwasi Kwarteng, decided early in her leadership role that what the U.K. needed was a dose of fiscal stimulus to set things right. The principal was fine – fiscal stimulus can be used to jump-start a sagging economy. But then there’s that old chestnut of financing the stimulus plan. The US can get by with murder in this respect because they can just keep the printing presses rolling and print US Dollars ad infinitum, and for various reasons, investors keep lapping them up. Unfortunately, Sterling does not enjoy such a privileged status (nor does any other currency / country), so investors punished Ms Truss and her merry men for trying to cook up a stimulus plan without the means. Investors fled so fast from UK government bonds (Gilts) and Sterling that it nearly caused a fiscal collapse, which then led to a collateral crisis with UK pension funds. How do you defend that?
Ms Truss provided a 4,000 word written statement to The Telegraph over the weekend, which I couldn’t access since I am not a subscriber, and also went on the radio talk show circuit. Apparently this was a conscience effort to rewrite history, not easy when the facts speak so loudly and clearly during her two month disastrous reign Whether you like PM Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt or not, they righted a ship that was sinking fast, perhaps even giving the Conservative Party half a chance come 2025. What would I say to Ms Truss if she cared? “Let more time pass – a lot more – before you try to rehabilitate your legacy, and along the way, swallow some humble pie.” Let’s face it – her short tenure as PM nearly undid the UK. Do I see this sort of contrition happening with Ms Truss? Absolutely not, at least not anytime soon, because it’s not generally in the DNA of politicians to show humility, and it is certainly not in their constitution to take blame. This weekend charade was nothing more than second-rate entertainment, embarrassing really to Ms Truss. Thankfully, the UK has moved on.
US debt ceiling
This is a recurring nightmare that is simply a waste of time and energy but happens way too often. How can the largest, strongest economy in the world repeat this saga every few years? I guess it is part of the American fabric, like having guns and not having universal healthcare. But I’m not going to digress….
The way the debt ceiling debate is often crafted is that Democrats want to borrow money to finance their elaborate spending programmes, and the Republicans want to curtail expenditures and balance the budget. History shows this is far from the truth. For either party to blame the other for ongoing deficits is so far from reality that it is laughable, unless you are stupid, bad at mathematics, or unable to understand the historical progression of the US deficit. Here’s the evolution of the US deficit from FRED over the last 50 years or so.
You can see from the graph above that the last time the US ran a surplus was under President Clinton (D) in the late 1990s. Below is the list of the largest increases in national debt by President (source here).
1. Obama (D), $8.3 trillion increase in national debt over eight years
2. Trump (R), $8.2 trillion increase in national debt over four years
3. Bush (R), $6.1 trillion in national debt over eight years
4. Reagan (R), $1.9 trillion increase in national debt over eight years
Here’s another depiction of the change in annual deficit by year, showing the president in power from The A-Mark Foundation. As you are looking at the graph below, keep two things in mind. Firstly, presidents “inherit” the prior year’s budget from their predecessor, so have no influence over the deficit in their first year in office. And secondly, recessions make deficits worse.
The point of this mumbo-jumbo is to convey that whilst the increase in the national debt is politicised every time there is a discussion about raising the debt ceiling, both parties are culpable. The finger-pointing going on whilst this discussion drags on is nothing more than political theatre, but it is sufficiently annoying to provide a distraction for markets. Do we really have to do this so often?
On a related point for context, keep in mind that the majority of the fiscal spending each year is mandatory, not discretionary. In 2021, 23% of expenditures were discretionary, 73% were mandatory and 4% went to pay interest on the $31 trillion or so of federal debt. However, the current debt ceiling of $31.4 trillion will soon need to be increased (or dropped), as the total national debt is bumping right against it now. The idea of a US default is absurd, but not impossible because of the mindset of both political parties.
Congress, please get this done, so there is one less thing for investors to worry about!
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 A good overview of US expenditures is in the FiscalData website of the US Treasury, which you can find here.