The "X" Date - Inlet Private Wealth

After a disappointing 2022 tax season (from the government’s perspective), the U.S. debt ceiling’s “X” date is now fast approaching. Estimates for when the U.S. Treasury will run out of cash have ranged from as soon as early June to as late as September and the U.S. Treasury Department is already utilizing extraordinary measures to avoid going over the current debt limit. If a compromise cannot be reached, the U.S. Treasury will eventually have to resort to even more extreme measures such as shutting down the government to avoid payrolls, Social Security payments, etc. before the U.S. is forced to default on its debt.

The U.S. currently has approximately $31.4 trillion of debt. This amount represents $93,393 for each of the 336 million U.S. citizens. The Bureau of Labor Statistics estimates that the median annual pre-tax earnings of wage and salary workers in the U.S. is currently $57,200 while the debt represents $263,423 for every full-time wage and salary worker in the U.S. The weighted average annual cost of this debt is currently 1.8% and nearly half matures within the next three years. With the cost of three-month T-Bills currently more than 5%, the Congressional Budget Office (a non-partisan organization) projects the federal government’s interest costs will surge, contributing to its projected $20.2 trillion in cumulative annual federal budget deficits over the coming decade. If accurate, this would increase the amount of U.S. debt nearly 65% to $50.7 trillion by 2033.

Approximately 65% of U.S. government spending (Social Security, Medicare and Medicaid) is mandatory and indexed to inflation. After making the current interest payments on the $31.4 trillion of U.S. debt, the remaining discretionary portion of the federal budget is just 28%. Since the tax brackets in the U.S. are also indexed to inflation, a rapid rise in interest costs could squeeze out discretionary portions of the budget. President Biden has been firm that he wants no fiscal reforms and wants a clean debt ceiling increase. Speaker of the House McCarthy’s Limit, Save, Grow Act of 2023 would raise the borrowing limit by $1.5 trillion in exchange for limiting future spending growth, put work requirements on Medicaid and remove the funds allotted to the IRS and the clean energy tax credits that were part of the Inflation Reduction Act. There is virtually no chance McCarthy’s plan will be passed by the Senate but the passage of McCarthy’s bill now transfers some responsibility to the Senate, which needs 60 votes to pass any bill.

The debt ceiling will almost certainly be raised in 2023 but the process is certainly not an example of representative democracy inspiring confidence. Collectively, Washington D.C. appears complacent that rising debt is merely a political issue and not a cause for economic or financial concern as most current policymakers have only served in office during an era with low inflation, low interest rates and declining debt service costs. Uber political polarization makes it very unlikely any agreement on the debt ceiling will mitigate the CBO’s estimated growth of U.S. Government debt. While there is not an ironclad threshold beyond which deficits or debt become a problem, at some point, either bond vigilantes and/or the rating agencies will raise an alarm over the US debt and rising interest costs. Financial brinksmanship by politicians has not historically been good for the financial markets but it may result in some excellent long-term investment opportunities.

Ted E. Furniss, CFA May 2023

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