Looking Ahead at Fiscal Dragons in the Budgetary Vast Deep!

Forecasts should “Buy Gold!”

Long-time friends may have noted that we don’t devote much space to long-term budget projections out of Washington.  Not that we pay a lot of attention to a lot of stuff that comes out of Washington, but long-term budget projections should not be relied upon by anyone.  The only thing they reveal is what people in Washington think, which can be quite astonishing.  We sometimes publish 10-year budget projections since some people on Wall Street take them into account.

But, politics and politicians being what they are, here is a rule of thumb:

The only budget that really matters is the current one.  Period.  Full Stop.

Anything else is subject to change.  With that in mind we want to share some 30-year Congressional Budget Office projections to show you why they are not to be relied upon.  We do so with the expert guidance of David Stockman, US budget director in the Reagan administration.

With policies currently in place, the publicly-held debt will grow by $102 trillion over the next three decades, reaching a staggering 154% of what would be $85 trillion of GDP by 2054.

We choke when we say the debt will grow by $102 trillion over the next three decades.  But that is only part of the story, the naïve, Rosy Scenario part.

As Stockman points out, that projection depends on highly unlikely, if not absolutely impossible conditions:

• The underlying CBO projections presume that there will be no recession during the 34-year span from 2020 to 2054, and that, in fact, there will be perpetual full employment at about 4% from here on out.

• Of course, during the last 30 years there have been three recessions, and no such full-employment perfection was even remotely achieved. The short spells of 4% unemployment or under, in fact, were few and far between—in stark contrast to the CBO baseline which presumes 4% unemployment year after year until 2054.

• The CBO projections also assume that inflation stays strictly in its Fed-prescribed lane at around 2.0% for the next 30 years, as well. That hasn’t remotely happened during the last 30 years, when the inflation rate has exceeded the 2.0% mark during 17 years, and frequently by substantial amounts.
  
• Likewise, it assumes that the bond pits will have no problem funding more than $100 trillion of new Treasury debt at yields which average just 3.6% over the next 30 years. Of course, the actual weighted average yield in the Treasury market today stands at 4.2% and the fulcrum 10-year note has been cycling around 4.4%, albeit at this point the prospective debt inundation is just getting started.

• Again, judging by the last 30 years of history, the odds that interest rates will be pushed down into the mid-3% range and remain there for 30 years running would not seem very compelling, either.

There you have it.  The official CBO 30-year budget projection is deadly in its own right.  But it depends on no recessions, 30 years of practically no inflation, and the Treasury funding all this debt for 30 years at interest rates below today’s rates.

“Even then, the truth is surely far worse,” says Stockman.  “Just remove one brick from the edifice of Rosy Scenario—perpetually low interest rates—-and the fiscal dragons truly come surging from the budgetary vasty deep. That is, if you assume the weighted average UST yields will clock in at 4.25% rather than 3.5% over the next three decades, the added debt from the permanent extension of the OBBBA would amount to $156 trillion….

“That is to say, there is really no escape from the Fiscal Doomsday Machine that has now tightly engulfed the nation’s very governing process.”

Like the antiquarian maps that showed the edge of the world with the warning “There be dragons!”, we are in uncharted waters.  Stated differently, if even the rosiest of rosy budget projections is a hair-raising calamity that will have the Federal Reserve waving its digital money creation wand as its only alternative, and if the real world will be much more… well, real, it only makes sense to get out of the way.

Speak with a Republic Monetary Exchange gold and silver specialist today for a sensible plan to protect yourself from the Fiscal Doomsday Machine.