illustration by nuvolanevicata / dreamstime
Priority #1: Stay Solvent! Election year cycles thrust civic debates to the forefront and reveal national priorities. Immigration, healthcare, trade, climate change, education, and gun policies have all received raucous debate to date. This is as close to a strategic planning process as our federal government gets. Corporations go through strategic planning sessions frequently, rank priorities, and battleplan for achievement. While corporate priorities change for CEOs, one priority remains ever-present: Stay Solvent! And yet, little, if any, campaign copy for 2020’s federal strategic planning session addresses our nation’s fiscal fortitude, even as we run trillion-dollar deficits. Should solvency rank higher as a presidential priority?
“The United States is the only country of the AAA-rated countries that does not have a credible fiscal consolidation plan.” — Fitch Ratings
Before the great financial crisis, the gross debt-to-GDP ratio for U.S. federal debt stood at 60 percent, essentially unchanged since 1990. Two years later, it reached 82 percent after the deployment of unprecedented stimulus measures post-financial crisis. In response, a faction of House Republicans created the “Tea Party” as a check on fiscal profligacy, President Obama appointed the Simpson Bowles commission to propose tax and entitlement reform, and Speaker Paul Ryan penned his Path to Prosperity budget to reduce national indebtedness. Those efforts fell fallow as our national debt has risen without interruption to 108 percent today.
In theory, higher debt levels should reduce creditworthiness and drive up interest costs. In practice, the major ratings agencies did downgrade U.S. treasury bonds in 2012. Fitch Ratings went so far as to say, “The United States is the only country of the AAA-rated countries that does not have a credible fiscal consolidation plan.” Sounds serious! At the time, our government had to pay 1.65 percent interest on 10-year bond issuance. Today they pay roughly the same, despite much higher debt-to-GDP ratios. Shouldn’t more debt imply lower creditworthiness and higher rates? Apparently not. The International Monetary Fund has cautioned that government debt-to-GDP ratios above 60 percent invite instability and limit growth.
Greece learned this lesson in 2012 as investors demanded 35 percent interest payments at 10-year bond auctions. By that point, Greece’s debt-to-GDP ratio stood at 160 percent, with double-digit deficits adding more. Post-EU bailout and fiscal disciplining, the Greek debt-to-GDP ratio is now 181 percent, with interest costs below ours at 1.38 percent. The Japanese lead the planet with a debt-to-GDP ratio of 236 percent, yet purchasers of their 10-year paper pay .09 percent annually for the privilege of owning their bonds due to negative rates. If investors are willing to lend to the Greek government with 181 percent debt-to-GDP at 1.38 percent, and to the Japanese government with 236 percent debt-to-GDP at negative .09 percent, then the breaking point for the venerable USA must be many multiples higher before incurring any financial disciplining from markets. In the immortal words of Dick Cheney, “Deficits don’t matter.”
Bottom Line: The lack of presidential debate around our fiscal fortunes seems reckless, if not immoral, to many campaign observers. But individual and corporate debt issuers don’t have the luxury of printing their own currencies to service their debts, with their own central banks. Also, our high government debt-to-GDP ratio still sits well below many other nations carrying even lower borrowing costs. While our federal fiscal folly may prove threatening in the long run, in the short run, based upon market comparisons, it’s a non-issue. CEOs use strategic planning processes to avoid crisis; presidents use campaign seasons to respond to them. Fortunately, the insolvency of the USA is not in season … this season.
David S. Waddell is CEO of Waddell and Associates. He has appeared in The Wall Street Journal, Forbes, Businessweek, and other resources. Visit waddellandassociates.com for more.
