Loading ...The reality is that global central banks have fundamentally inflated the price of government debt, while systematically altering market risk perceptions. And, yes, it has made deficit spending appear much less problematic. As illustrated most starkly in Japan, on an ongoing basis governments issue enormous quantities of debt instruments without markets demanding one iota of risk premium. Heck, the bigger the deficit (and heightened systemic risk) the lower risk premiums. It’s all astonishing, entertaining – and has turned almost comical. But it has seriously become the greatest market distortion in history – today viewed as “business as usual.” And, importantly, with “risk free” sovereign debt the foundation of global finance, distortions in prices and risk perceptions encompass securities markets (and asset markets more generally) around the globe.
“The government’s debt burden, measured as a percentage of gross domestic product, remains stable as long as debt and GDP grow at the same rate.” Okay, except that for a decade now debt has been expanding more rapidly than GDP – for what is now among the longest expansions on record. And I strongly caution against extrapolating 3.5-4.0% economic growth into the future. A scenario of 5% to 7% debt growth, with zero to 2% real GDP expansion, is not only not unreasonable, it’s realistic. And let’s not disregard demographics and the projected surge in entitlement spending. Truth be told, we’re now a mere garden-variety bear market and recession away from Fiscal Armageddon. At some point, markets may even place a risk premium on Treasury debt. Interest payments on federal borrowings are projected at $364 billion in fiscal 2019. Factoring only a small increase in market yields, debt service is projected to more than double. In the event of a deep recession and another round of bailouts, annual deficits approaching $2.0 TN are not crazy talk.
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