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Federal Budget & the Debt Ceiling. How to tell they are lying.
Every year it’s the same old same-old. At budget time they explain to the American people how spending lots more money tomorrow actually saves money over 10 years, and anyone who can’t see that is just not fiscally savvy enough to understand the nuances of macroeconomics and the magic elixir of growth. We are going to grow our way out of debt!!! Today, we have the White House asserting that this year’s “Big, Beautiful Bill” will … “reduce deficits by at least $6.6 trillion over the next decade.”
Yeah. Right.
My first question is, “Reduced compared to what?” They are notorious for “reductions” that are really smaller increases than otherwise forecast. So, according to some reports, spending was forecast to go up by 100. But they are only raising spending by 95. That counts as a reduction of 5. Is this hypothetical 6.6 trillion more of the same?
Their forecasts, predictions, and promises are useless. None of them matter. There is one, and only one, place where the economic rubber meets the road: the Debt Limit. The debt is the actual real-world outcome of all their pie-in-the-sky prognostication. And it can’t be spun or argued around. It’s why, despite the annual promise of how “the bill pays for itself,” we are now 36.2 trillion dollars in debt, up from 5.5 trillion in Q1 2000.
So ignore their predictions about revenues or expenditures, deficits or taxes. They are only words, and they’ll swear to whatever they think you want to hear. Watch what they say and do regarding the debt limit. That gives away the game. And when Trump declares the debt limit should be abolished, it tells you the truth about what he really believes will happen.
Published in General
It’s not hopeless. It just gets harder and the remedies will be more painful with each passing year. But there inevitably will be an end to the deficit spending when the bond market finally says, “ENOUGH!”
It would really be best to avoid that. Mr Market isn’t nice when he’s angry.
Don’t trade with the communist mafia.
Amen!
I don’t see how it can be avoided. Both democrats and republicans absolutely refuse to stop the naked spending spree.
And when it’s stopped FOR them, they can both claim “not my fault!”
Will Congress and the American people respond to rising bond rates and dropping credit ratings before it is too late? I hope so.
We have the most dynamic economy in the world, so we can still grow our way out of this, although that is getting harder year by year.
Maybe it’s some kind of new Marshall Plan. They figure if we collapse, everyone else will collapse too, and then we’ll be able to get out of it faster than anyone else, like before.
We seem to be there now. Bond markets all over the world are puking. Buckle up.
No, they aren’t. Since the House passed the “Big Beautiful Bill” on May 22, the performance of bond markets around the world has been the opposite of “puking”.
Yields on 10-year securities from May 22 to today:
U.S.: 4.55% to 4.47%, down 8 basis points.
U.K.: 4.74% to 4.66%, down 11 basis points.
Germany: 2.64% to 2.57%, down 7 basis points.
France: 3.32% to 3.24%, down 8 basis points.
Italy: 3.66% to 3.51%, down 15 basis points.
Canada: 3.38% to 3.31%, down 7 basis points.
Australia: 4.48% to 4.32%, down 16 basis points.
Japan: 1.55% to 1.48%, down 7 basis points.
Link (for anyone interested in keeping track of what bond markets around the world have been and are really doing):
https://www.cnbc.com/bonds/
The best indicator of the risk that the market feel on US default is the trend in real interest rate on US Treasuries (nominal interest rate on Treasuries minus inflation rate), not the nominal return. The real return on 1-year Treasuries has slowly drifted down from 2.3% in January 2023 to 1.8% now.
Red – inflation rate
Black – nominal return on 1-year Treasuries
Blue – real return on 1-year Treasuries
A better indicator would be the real return on 10- and 30-year Treasuries because they would reflect more of a risk premium, but I didn’t find such a graph.
https://tipswatch.com/
Below is a chart of the 10-year Treasury real return rate, using your selected starting point, January 2023. As you can see, it “drifted” a “whopping” 11 basis points in 2 and a half years, from 1.78% in Jan ’23 to 1.67% now, basically fluctuating within a narrow band between 2.1% and 1.5% (with a brief spike down to 1.06% in June ’23).
IOW, there has been NO trend, period, let alone a trend that can be attributed to market perceptions of default risk.
Link: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y