Is America’s Debt Path Sustainable?

Last week, Treasury reported that the deficit ballooned to $319 billion in the first three months of the government’s fiscal year.

That’s up a truly “impressive” 42% from the same period last year.


Of course those numbers can’t be right. Because if they are, it would mean that Larry Kudlow is either lying to America about the purported deficit-shrinking impact of Donald Trump’s tax cuts or else it would suggest that Larry is clinging to the hopeless idea that supply-side economics actually works.

But Larry isn’t a liar and he certainly doesn’t harbor any 80s nostalgia that might make him predisposed to believing that tax cuts are the solution to everything, so again, Steve Mnuchin’s numbers must be wrong.

I’m just kidding. Larry is lying at the behest of Donald Trump (and you know, that’s a sad state of affairs, because while Kudlow has been a standing joke for a long time, it’s somewhat painful to watch him morph into Sarah Sanders) and he is absolutely predisposed to suggesting that tax cuts will solve everything if you just wait around long enough for “growth, growth, growth”.

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Everybody knows Trump’s fiscal policies are reckless and what’s lost on the “what about previous administrations?” crowd is that there’s a difference between ballooning the deficit for a reason and issuing mountains of debt to fund fiscal stimulus during a late-stage expansion when the unemployment rate is sitting near a five-decade nadir. The former is defensible, the latter is not only asinine, it’s insane.

But that’s Trump for you, “asinine” and also “insane”, which goes a long way towards explaining why the administration decided to mortgage the country’s future in order to give a tax break to the wealthy and juice an economy that definitely didn’t need juicing.

It’s with all of that in mind that Goldman is out with a new note assessing US debt sustainability and they start off by reiterating that “despite unemployment near fifty-year lows, the federal budget deficit is on track to increase significantly, likely pushing federal debt levels to over 80% of GDP.”

In the right pane below is a chart that shows you just how anomalous Trump’s policies really are (we’ve added a handy red annotation to help you out):



That red oval shows you why Trump’s fiscal policies are so worrisome. You can trot out all the “whataboutisms” you want to trot out, but that chart is inescapable, which is why you won’t see it on your favorite Trump-friendly doomsday financial blogs.

The current path of US fiscal policy raises a number of questions, some of which revolve around the notion that with interest rates as low as they are and growth still some semblance of robust, budget deficits aren’t all that pernicious. This is one reason why Trump is so insistent on compelling the Fed to keep rates low. He already holds the record for most interest paid in a year and he’s probably not excited about seeing that headline pop up again next fiscal year.

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Red Ink: The Politics Of Fiscal Insanity

Trump Now Proud Owner Of Largest Deficit Since 2012 And All-Time Record For Most Interest Paid In A Year

With that in mind, Goldman uses a simple model of debt dynamics to see what happens in the event rates rise and primary deficits increase. The results are not “great again”.

“Debt and interest payments are manageable at the levels of the primary deficit (2%) and interest rates (2.75%) that prevail today [but] higher interest rates along with larger target primary deficits lead to significant increases in interest expenses as we approach 2050”, the bank writes, before warning that just “a 1pp higher average interest rate (3.75%) along with a target 3% primary deficit leads to interest expenses of close to 6% of GDP by 2050, a level higher than any in postwar US history.”




Of course the worse off you are fiscally, the more you’ll likely have to pay to finance your deficits, which means projections that don’t at least try to account for the effect of a deteriorating fiscal outlook on yields are bound to understate debt servicing costs. As Goldman goes on to write, “academic studies [have] found that a 1pp higher deficit level increases ten-year Treasury yields by 20bp [and] other studies find that higher debt levels lead to higher Treasury yields as well.”

Even more critical than all of the above is the extent to which resorting to fiscal stimulus when you don’t need it risks a scenario where you have less room to operate when you do. This is one of the main criticisms of Trump’s fiscal largesse.

“A more immediate concern is that high federal debt levels may constrain a country’s ability or willingness to use fiscal stimulus in the event of a cyclical downturn”, Goldman warns, adding that “policymakers may be reluctant to use fiscal policy more actively in a recession due to worries about further debt increases, regardless of whether such fears are economically grounded.”

Citing a recent academic paper (here), the bank notes that “that higher debt-to-GDP is associated with smaller increases in the fiscal deficit, both in the year the recession starts as well as up to three years after the start of the recession.”

That, in turn, suggests that countries with worse debt dynamics headed into downturns will likely experience worse growth outcomes during and after recessions in part due to an inability to respond with fiscal stimulus. Sure enough…



The takeaway, then, is that current US fiscal policy is not only putting the country on a precarious path, it is also raising the chances that the next downturn will be worse than it otherwise would have been.

And for what? All so the self-declared “king of debt” can perpetuate the myth that he’s ushered in an economic “miracle” at a time when the economy was already doing fine.

Nothing further.



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25 thoughts on “Is America’s Debt Path Sustainable?

  1. If your relentless Trump-bashing blame game were correct, then Congress would have had absolutely no control over debt…Spending bills would originate and pass solely in the White House…In several of past years, Congress operated without an approved annual budget and spent like drunken degenerates….debt balooned over the past two decades, and Congress only added to the debt rather than addressing it….Gee Whiz, do you want “austerity” until the next Dem is at the helm?….Everybody face the facts, this is a political website you have here.

    1. Which is why the description if you Google the site is: “Daily financial and political snark.”

      You seem to be having a hard time coming to terms with the fact that this site is overtly, absolutely, unabashedly, every day, all day, always will be, until the end of time, about the intersection of politics and finance.

      You have not uncovered a “secret”. The fact that this is a political website is *****literally in the actual meta description in Google search results****** and we say it all the time.

      If you want to wake up everyday and reset your brain to pretend like you have forgotten that, then be our guest, but this isn’t a secret you have uncovered.

      1. You are walking into Baskin-Robbins everyday and exclaiming: “THIS IS AN ICE CREAM SHOP!!!”

        And everybody is like: “Ummm, right. We’re here to eat ice cream.”

        1. Oh oh oh!! have you tried Ben & Jerry’s flavor Chocolate Therapy? It is the best. Sounds like dogshitjj needs some therapy too. 😎

          p.s. I’m serious about both!

        2. No, you and Murphy are pedalling fudge…and it ain’t made of sugar…You are entitled your redundant deflection-answers and alternative facts, its your site….hows them fer words, murph?

          1. I love little folks like the sunny jiggler. I could call him a fckhead rtard moron right to his ugly little sunburnt face and he’d STILL vote for me. All I gotta do is scream WALL and point at Hilly. Gobless ‘Murica!

          2. “Tronald” please see a doctor, you are really sick….Do you have any friends or family that can help you with your problems?….get a life, please!

    2. You say “relentless trump-bashing blame game”, intelligent and sane people say “fact based reality”, because you know, fact based reality is very mean to the wanna be dictator.

    3. You voted for me. It literally isn’t possible to get any dumber than that. Ferchrissakes, I TOLD you I thought you were a pointless mug waste of air, and TOLD you how I’d punish you for voting for me.And yet, you still gave me your vote. Heheheh! Keep on keeping on, Sunny Jiggler! I NEED myopic neurally challenged folks just like you, to MAKE ‘MURICA GREAT AGAIN!

    4. P.S. Heis, where is your intellectually honest chart and commentary on the “Elephant in your room”, Which is entitlements??…kinda shoots a big hole in your anti-Trump argument !…Also, as you know, a more measured aproach on a path toward normalization would not have triggered such a violent backlash in the stock market, such as we saw at the end of last year. The overly aggressive PACE of tightening caused Trump’s concern, and you should have been concerned too, unless your money was timing and shorting the markets. I am sure that more than a few stop losses were triggered by 20-30% drops in the stock market….locked-in losses for retirement accounts.

  2. The best part? Politics is only one facet with which to interpret and understand the financial news and opinion here.. It”s really a take on life in general for me, and an interesting one at that (even when I don’t agree, which is more often than not).

    So thanks for keeping it going, and keep doing more please!

    1. And I mean, there’s never any malice on my end. I just call it like I see it. If people want to tell me i’m full of sh*t, that’s certainly fine, I just want to make it clear that what I present are facts. My extrapolation from those facts is obviously subjective, but what I think readers should bear in mind is that a lot of other sites which are like HR (i.e., prolific, but not mainstream outlets), don’t even start with facts. Some of them actually start from distortions and falsehoods and then pile subjective extrapolations on top of that. That’s why I think Heisenberg Report is a better alternative. We don’t start with lies and we don’t distort other people’s analysis. We start from facts and offer an honest assessment of what other commentators and analysts are saying, and then offer our own (often humorous) take. Some other sites claim to do that, but in reality, there is an agenda that goes well beyond pushing a particular point of view. I have no such “agenda”. My agenda is: study —-> write —-> read —–> write —–> study, in a never-ending loop, with some cigar time and beach trots in between. Perhaps most important of all, there is of course the man behind the Heisenberg moniker, but that’s as far as the shell game goes. There is no man behind the man behind the man, so to speak.

      1. Heis, you left out one other thing I really enjoy. Your vocabulary is awesome. Unlike someone else, you really do have the best words and I love that! 🤓

      2. Most of the regulars on this site respect and understand what you do and why you do it that way..We all try to learn a bit from each other along the way as a bonus. I for one see in the Political Science sense an inevitability to certain consequences that will take place in the ‘future’ as a result of the can kicking that prevails.. A plug for H…Attack that thought one day in a posts if you feel so inclined and it’s not on your list of what topics you don’t want to indulge in.

  3. Debt. In 1966 the debt was about $320 billion. 2016, 50 years later it’s roughly $19 trillion, an 8.7% per year aver growth rate. If we keep that up the debt in 50 years will be $1.2 quadrillion. Sure hope that growth materializes.

  4. The first poster represents the problem this country has. A portion of the country will not hold “their” guy accountable which allows “their” guy to continue what they have done and even push the envelope. Happens under every prez D or R. This “emergency” now has “their” guy acting like congress appropriating money. Right is right and wrong is wrong. It really isn’t that hard. We should be able to help the president to make the right decisions rather than enable bad behavior. If base support fell he would make better decisions (I think or hope but he may spite the whole country also).

    1. Remember the 1 Trillion+ (and still counting) slush fund that your guy had?…how about cash for clunkers, free cash, free phones, funds sent to foreign entities and who knows what else…now that’s real executive appropriation. And there weren’t many obstructionists hanging around at the time to reign in spending. Emergency declarations are nothing new, and if you really, really think about it, he’s doing the right thing by using a multi-pronged approach to get results where other presidents have failed. In the whole scheme of things, a rational person would have to admit that the benefits far exceed the costs to our country.

  5. Look…. People believe what they want to believe until faced with facts or until slapped in the face by tragic consequences of their stupidity. Right now, Republicans are telling themselves that deficit-fueled tax cuts will pay for themselves. It didn’t work during the Reagan administration and it is not working now. Manifestly, facts are not enough to deflect the blind faith of the Republicans, so we are on track for the alternative.

  6. FFS, what part of this don’t you rubes get? Dollars are on;y for the little folks. Us ‘big boys’ don’t have much use for it. We store our wealth in ASSETS. Like stocks, or houses. Or gold plated casts of our genitals. We literally don’t care about inflation, or dollar debts. It is eeeeerelevat to us.

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