By Tom Sedoric & Casey Snyder

A recent posting in Axios notes: “A self-inflicted fiscal crisis could come at a terrible time amid a fragile U.S. economy and undermine a Treasury market that underpins the world financial system.”

To what are they referring? Look at our nation’s finances today. There’s another looming borrowing increase on the horizon with a Congress that can barely elect its own Speaker. We point out these legislative realities in the wake of a holiday season headline in The Boston Globe that caught our attention: A ‘rapidly growing death spiral.’ How our $31.3 trillion national debt is getting even more expensive.

For perspective, in 1985, a bipartisan trio of U. S. Senators decided enough fiscal irresponsibility was enough. Senator Warren Rudman (R-NH), Senator Phil Gramm (R-TX), and Senator Ernest “Fritz” Hollings (D-SC) came together in an attempt to stem the tide of rising annual federal budget deficits and the overall national debt. At the time, Congress’s efforts were coordinated with Chairman Volcker at the Federal Reserve to provide a seemingly unified response to inflation and government spending.

In fiscal context, this collaboration of bipartisan Senators and the Fed came during a decade when annual federal budget deficits rose in 1981 from $74 billion to $221 billion in 1990. During Ronald Reagan’s presidency, the federal debt nearly tripled from $738 billion to $2.1 trillion. In less than a decade, the U.S. went from the world’s largest global creditor nation to the largest debtor nation.

The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 was designed to provide discipline and “adulthood” to fiscally undisciplined lawmakers by balancing spending increases with tax increases or budget cuts. After parts of the law were declared unconstitutional, a revised act was passed in 1987 with the result of the annual budget deficit dropping to approximately $150 billion in the years 1987 to 1989.

Though battered, the spirit of Gramm-Rudman-Hollings was alive when a bipartisan budget-cutting compromise, signed into law in 1997, led to federal budget surpluses ranging from $68 billion to $236 billion in the years 1998 to 2001. At the same time, the federal debt froze at around $5.6 trillion. Next came tax cuts, the “War on Terror” in 2001, and the Iraq War in 2003. Since 2003, annual federal budget deficits and the U.S. debt have skyrocketed.

Sadly, these developments stirred little more public interest than a glance at the national debt clock in New York City. The days of proverbially whistling past the debt graveyard are coming to an end as today’s Federal Reserve Bank aggressively tackles inflation with interest rate hikes, but without cooperation on the fiscal side and Congress. Per the Boston Globe story: 

“Like a consumer grappling with a massive credit card balance, the federal government is paying more just for the interest on the national debt. Government projections show those interest costs tripling from $399 billion this year to $1.19 trillion in 2032. Borrowing most likely will have to increase just to pay for the higher interest expenses.”

We have often discussed in the past about the power of compound interest and its ability to bolster portfolios. The national debt is the flip side of its power to undermine fiscal and political stability. In the book “The Sun Also Rises”, one of Ernest Hemingway’s characters asks another how they went bankrupt. “Gradually and then suddenly” was the reply.

What happened in Great Britain last summer was a hard lesson learned. We watched how quickly a government can fall when monetary policy clashes mightily against populist public sentiment. Institutions can crack wide open when the public loses trust and faith in them.

In the United States, the debt crisis metastasizes as we witness the reality of a ‘demographics is destiny’ paradigm. The national debt grew while a vast generation of baby boomers entered their peak earning years. Concurrently, Congress decided to use the Social Security trust fund as a budget enhancer. Yes, Congress borrowed from the trust fund we all paid into and used those funds to pay out deficit spending. The peak distribution phases for a large swath of the population are taking place now, and there are not enough millennials and Gen X’ers entering their peak earnings years to balance the books based on current tax and entitlement policies.

There is a lot to digest, and at times, this challenge keeps us ‘up at night’. While inflation is slowing with serious Fed intervention and the job market remaining strong, we need to remember that the Federal Reserve Bank of the United States cannot fight this battle alone. As it did in the 1980’s, Congress needs to step forward and shrink the deficit spending while we prepare for higher taxes for us all. Will Congress enact extreme measures like the rumored “Discharge Petition” or other shenanigans? Only time will tell.

Navigating the uncertain consequences of this fiscal earthquake will require patience and flexibility. While we can yearn for the return of leaders like Fed Chair Volcker and Senators Graham, Rudman, and Hollings, the catastrophic implications of not focusing on and attending to mitigate this fiscal crisis should not be a legacy we leave to future generations. 


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