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Government Debt Is a Diminishing Risk.

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    October 28, 2013

    One by one the worries of the doomsday theorists created by the 2008 financial meltdown have dropped away.

    First it was that the 2007-2009 ‘great recession’ could not help but continue its plunge into a next ‘Great Depression’. Then it was that the government’s massive rescue efforts in 2008 and continuing into 2009 could not work, and indeed would hasten the plunge into a depression. (And as a result the bear market would continue and take the Dow down to 1,000 or lower).

    Although each of those doomsday scenarios lost credibility, disaster still supposedly awaits as a result of the record government debt taken on in the rescue efforts, and the continuing annual budget deficits, which have the debt level still increasing four years after the great recession ended.  

    However, even that doomsday scenario is beginning to fade, with the picture starting to look like the 1990s. But how many people realize that? Apparently very few.

    In the 1980s and early 1990’s government debt also reached record levels, as a result of the Reagan administration’s massive government spending programs to pull the economy out of the 1970’s malaise, the 1970’s string of recessions, stagflation, and repeated cyclical bear markets during that long 1965-82 secular bear market.

    The massive government spending efforts worked that time too, even though at the time the popular opinion was also that there would be no way to escape the consequences. Economists competed with each other with dire forecasts of how the nation was headed inevitably into bankruptcy.

    But in the early 1990’s, as the economy began to recover, although very anemically, the fractional improvement in the economy and fractional increase in tax revenue from improving employment, rising stock market profits, etc., had the annual budget deficits trending lower each year. Like now, even though the annual deficits were smaller, the national debt was still rising, but at a much slower pace. And the annual deficits continued to come down until they disappeared, turning into increasing annual surpluses.

    And the previous doomsday predictions of the end of social security, the need for massive cuts in education and healthcare, and the inevitable bankruptcy of the U.S. anyway, quickly reversed to expectations by 1999 and 2000 that the national debt would be completely paid off within ten years, social security would be funded forever, and so on, as Congress began planning how they would spend the reversal to budget surpluses.

    This chart, courtesy of David Bianco of Deutsche Bank, shows how closely the debt and budget deficit is currently following the 1990s scenario of declining annual deficits, as the economy continues its slow recovery.

    The annual budget deficit has already fallen from 10% of GDP to 3%.


    And here’s another interesting chart.

    The real risk of government debt is the liability and burden of the interest payments on that debt.

    As the chart shows the peak period for government interest payments on its bonds and other debt was in the 1980’s, when total government debt hit a new record, and interest rates (and bond yields) were still very high, just beginning to decline from the inflationary rates of the 1970’s.

    The current extremely low interest rates significantly reduce the government’s interest rate burden as a percentage of GDP, even though the total debt is higher than at its previous record high in the 1980s.



    Will interest rates be held low, and the economy continue to recover long enough for the similarities to the 1990’s to continue to annual budget surpluses? To the ability to pay down the national debt before interest rates rise and increase the government’s interest rate burden on its debt? Will the result be economic booms times, maybe even a stock market that surges up for the rest of this decade also, into a 1999 style bubble?

    Or will the doomsday theorists see their worries play out?

    Interesting times ahead for sure. 

    To read my weekend newspaper column click here: The Bull Market Continues, But Watch Out For The Short-Term

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.