Parting Shot continued from page 60
output , allowing the economy to grow at close to a 2 % pace , interrupted only intermittently by occasional recessions .
In short , while the baby boom generation will sadly fade in economic significance , there is no reason to believe that this will spell doom for the U . S . economy .
Sizing Up The Debt Threat A second strand to the narrative of economic disaster concerns the federal debt . In the last fiscal year that ended on September 30 , 2023 , the federal government ran a deficit of almost $ 1.7 trillion , or 6.3 % of GDP , with federal debt in the hands of the public rising to $ 26.3 trillion or 97.5 % of GDP . In their June forecasts , the Congressional Budget Office projected deficits of over $ 2 trillion per year for most of the next decade , with the debt rising to 122.4 % of GDP by 2034 . Moreover , these forecasts assume that the 2017 tax cuts that were set to expire in 2025 actually do so . If they were , instead , fully extended then , again using CBO numbers , the debt-to-GDP ratio would rise to 133.4 % by 2034 . Even this excludes the cost of further promises currently being made on the campaign trail , including eliminating taxes on Social Security and tips , further reductions in the corporate tax rate , and subsidies for first-time home buyers .
It is very reasonable to worry that our democracy has degenerated to such an extent that we will elect politicians who propose tax cuts or spending increases without any mention of how to fund them and who entirely ignore a long-term need to move the federal finances back to balance .
However , this does not mean we are on the edge of a fiscal catastrophe .
First , political promises , over and above the extension of the 2017 tax cuts , should be taken with a grain of salt . The current election campaign is very close , suggesting that whichever party wins the presidency may not also have control of both houses of Congress . Even a narrow sweep scenario would not necessarily mean significant fiscal stimulus , since Senate moderates in both parties have a history of obstructing their own president ’ s proposals .
Second , the world still has a huge appetite for U . S . Treasurys . In calendar 2023 , in order to finance the deficit , offset quantitative tightening by the Federal Reserve and rebuild cash balances , the U . S . Treasury Department borrowed almost $ 2.6 trillion from global capital markets , and the 10-year Treasury yield ended the year at 3.88 %— exactly the same rate as at the start of the year . In the first eight months of 2024 , the Treasury has raised a further $ 2.1 trillion , and the 10-year yield stands at just 3.91 %. This suggests that the world can absorb enormous Treasury issuance without a crisis .
Third , a critical factor in any fiscal crisis isn ’ t the debt itself — it is the interest payments on the debt . Provided inflation is low , long-term interest rates should also continue to be low , allowing the government to finance its debt cheaply . Since peaking in 9.1 % year-over-year in June 2022 , the U . S . CPI inflation rate has fallen to 2.9 % in July of this year and is on track to drop below 2.0 % early next year . The reality is that , despite the bout of inflation caused by the pandemic , the policy response and the Ukraine war , long-term forces such as diminished union power , greater inequality and increased use of information technology tend to depress U . S . inflation . And if inflation and interest rates remain low , the federal government can likely continue to run massive deficits in the years ahead without precipitating a crisis .
The Role Of The Dollar And then there is the issue of the dollar . The U . S . dollar continues to play a preeminent role as the currency of global trade , an asset on the balance sheet of the world ’ s central banks and the alternative currency of choice in countries around the world where governments allow their domestic currency to be ravaged by inflation .
The dollar ’ s role has significant advantages for the United States . It has funneled global savings into U . S . capital markets , boosting asset prices and allowing the federal government to finance its debt more cheaply . It has allowed the Federal Reserve on many occasions to coordinate a global response to regional financial crises . And it gives the U . S . government some ability to impose financial punishment on countries as an alternative to the horrible extreme of war .
However , it has also had its downside . Partly because of its pre-eminent position in world financial markets , the U . S . dollar has traded at too high a level from an economic perspective for many years . In raw numbers , this can be seen in a trade deficit that will likely top $ 800 billion this year . In the real world , decades of a too-high dollar have decimated American manufacturing , contributing to economic decline in many communities across the nation .
With inflation retreating , a steady decline in the dollar to more appropriate levels would likely be a good thing . However , despite efforts by some nations to undermine it , the dollar is likely to retain its role in the global economy . The reason is simple — there is no better alternative .
There are some countries , such as Russia and Iran , who resent the dollar ’ s position . However , they are in no position whatsoever to challenge it . Relative to the United States , their economies are small and weak and , given their arbitrary and corrupt authoritarian rule , are likely to stay that way . Nor has either government given the global public any reason to trust the rial or the ruble relative to the U . S . dollar .
China clearly has a much bigger and stronger economy than those of Russia and Iran and has greater hopes for the international use of the yuan . However , China currently faces major economic , fiscal and demographic challenges , making it unlikely to challenge the dollar anytime soon . It should also be noted that any sharp appreciation in the yuan due to its greater use in the global economy would only compound some of China ’ s economic problems .
The euro is probably the most respectable long-term challenger to the dollar . However , Europe has its own problems of slow growth and federal cohesion . Moreover , the European economy would also likely be hurt by any appreciation in the euro from its greater use as a global currency .
In short , despite occasional alarming headlines , there is no evidence that the
58 | FINANCIAL ADVISOR MAGAZINE | OCTOBER 2024 WWW . FA-MAG . COM