We should all feel better. Paul Krugman, Nobel Prize-winning economist, columnist for the New York Times and apologist for the Obama Administration recently headlined an op-ed: “Newsflash: There was no debt crisis.” He references the Congressional Budget Office (CBO) projection that the U.S. federal debt will be no higher in 2039, as a percent of GDP, than it had been at the end of World War II! In doing so, Comrade Krugman accepts as absolute the prophecy of a vision-impaired seer. He appears unconcerned that today’s federal debt borrowers lack the discipline of their post-World War II compatriots. He seems unwilling to account for the fact that while the last baby-boomer turns 65 on 2030, life expectancy continues to rise. Given current trends, there will only be two workers for every retiree in 2039. No matter. He sums up his opinion, in case anyone misunderstands him: “We don’t have a debt crisis, and never did.”
The federal deficit has declined from a $1.4 trillion peak in 2009 to an estimated $500 billion this year, which is good news. The reasons: slowly rising GDP has resulted in rising tax revenues; sequestration helped on the expense side; and the wind-downs of the wars in Iraq and Afghanistan have reduced defense spending. Those three points are positives. But two other factors exude a whiff of the ephemeral: One, the real cost of ObamaCare has not yet kicked in. Keep in mind, nothing is ever free, especially a government program that is advertised to be so. And, two, average interest rates on federal debt are currently 450 basis points below where they were in 2000 and 300 basis points below where they averaged during the post-War years. Were rates at their long-term historic levels, interest costs on $17 trillion in debt would be $500 billion higher – a meaningful increase on a $3.9 trillion budget.
The CBO’s projections, as to the future of interest rates, assume that markets have down-shifted permanently to the current level. Perhaps the Federal Reserve can work its magic and keep interest rates low. But history has shown that price fixing (including the cost of money) does not work over the long term. In times of crisis, for brief periods such as we had in the fall of 2008, it may be necessary for government to intervene in an extraordinary way, but over time free markets self-adjust and work best. I may not have learned much in forty-seven years in capital markets, but the one thing I feel pretty comfortable forecasting is that prices of all asset categories, including money, will fluctuate. At any rate, combined, all of the above factors have produced an unusual level of complacency about the possible threat of rising debt.