The Road Ahead

I don't know who is going to be elected President of the United States in two weeks.

I do know that they are going to face unprecedented fiscal challenges during their term.

The U.S. Treasury Department recently released the final federal budget numbers for the fiscal year ending September 30, 2024 showing a $1.833 trillion deficit.

The deficit was up from last year's $1.695 trillion deficit for fiscal 2023 despite federal revenues increasing by 11%, or $479 billion, from a year earlier. This suggests that the increased deficit is not due to a revenue problem.

The biggest driver of the increased deficit was interest on the federal debt that is now approaching $36 trillion.

$12 trillion of this debt has been added in the last four years. Debt is clearly being piled on at an unprecedented level.

It is certain to get far, far worse as compound interest on that debt is now taking over.

Interest on the federal debt for fiscal 2024 was $1.113 trillion.

By comparison, total individual income tax collections for the year were only $2.4 trillion.

We have reached a point where interest expense is consuming almost half of all individual income tax revenues.

Interest expense is also now 1.37x what is being spent annually on Defense ($826 billion).

To put the issue of interest expense in better perspective, it is expected that 189 million individual income tax returns will be filed in 2024.

That means that the average individual paying income taxes is seeing $5,820 of their income taxes being used solely to pay interest on the debt annually.

Spread among the entire population of 340 million, that is $3,235 of annual interest expense for every man, woman and child.

Credit: https://www.reuters.com/markets/us/us-budget-deficit-tops-18-trillion-fiscal-2024-third-largest-record-2024-10-18/

We are fast approaching the point at which interest on the federal debt will bury everything else.

However, the budget problems run much deeper than interest on the debt.

Consider, for example, that even if the federal government had no debt and was paying no interest, the budget deficit would still be over $700 billion annually.

An annual federal deficit of that size by itself would have been unfathomable until 15 years ago when we first saw the effects from the Great Recession of 2009-2012 on the nation's budget.

Credit: https://www.reuters.com/markets/us/us-budget-deficit-tops-18-trillion-fiscal-2024-third-largest-record-2024-10-18/

The fact that we are seeing the amount of red ink we are at a time of low unemployment is another large warning sign.

What will the deficits look like in a deep recession with high unemployment?

$4 trillion? $5 trillion?

As bad as the $1.8 trillion reported deficit is for 2024, I see some evidence that the actual deficit is larger and the number has been manipulated down by the Treasury Department. Was this for political reasons?

For example, the total federal debt outstanding on 9/30/23 was $33.2 trillion. It was $35.5 trillion a year later---an increase of $2.3 trillion.

Over the last year the Treasury Department reported a $1.8 trillion deficit but the federal government's debt increased by $2.3 trillion over the same period. This suggest that an additional $500 billion was spent over the last year compared to what came in.

More interesting is that in just the three weeks between September 26 and October 17 the federal government added almost $500 billion in new debt outstanding.

Why????

Source: https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny

What is going on ?

My guess is that the Treasury Department is borrowing heavily before the debt ceiling limit is reached on January 1, 2025.

Treasury is attempting to squirrel away as much cash as possible before that deadline.

You may recall that in May, 2023 a debt ceiling agreement was reached between Biden and then Hosue Speaker Kevin McCarthy (that was then approved by both houses of Congress) to do away with the debt ceiling limit until January 1, 2025. In other words, the Treasury Department had free reign to borrow as much as it desired until that date. 

Whatever the outstanding debt was on January 1, 2025 would be the new debt limit ceiling.

I wrote about all of this shortly after the agreement was reached in a blog post titled, "Debt Deal Disappointment".

This is what I wrote about the debt limit deal 17 months ago.

It seems that most of my predictions about what we would see have been realized.

The McCarthy-Biden proposal has no dollar-denominated debt ceiling limit.

Instead, it allows the federal government to borrow as much as it needs or wants until January 1, 2025.

This will mean that the debt ceiling could go up another $2 trillion, $3 trillion, $4 trillion or higher without  requiring additional Congressional approval.

If we were to face a recession in the next 18 months there is no telling what the debt limit might end up being.

Notice as well that the debt ceiling limit will expire after the 2024 elections but before a new Congress will be sworn in during the first few days of January, 2025.

This means the next debt limit ceiling discussions will occur during a lame duck session of Congress and what could also involve a lame duck President.

You also have to wonder what would stop the Biden administration Secretary of Treasury from issuing as many debt obligations as they could right before the January 1, 2025 deadline?

None of this is conducive to being in the best interests of the American people.

Since that debt deal was enacted into law on June 3, 2023 the amount of outstanding federal debt has increased from $31.5 trillion to $35.8 trillion----an increase of $4.3 trillion in less than 18 months.

On the current trajectory it would not be surprising to see another $1 trillion in debt taken on before January 1, 2025.

My prediction as to where the amount of debt would be at the end of the debt deal agreement actually appears to have been conservative.

It also appears that I was correct in predicting that the Treasury would be issuing as much debt as they could before the year-end deadline.

We now will have to wait and see what a lame duck President and Congress might do about the debt ceiling limit in December.

My guess is we will see that the can will be kicked further down the road again.

However, we are fast reaching the point where the can will not be able to be kicked much further.

A day of reckoning is on the horizon.

And on that day you are likely to find that you have run out of road.