Just wondering out loud... Debt/GDP coming off is probably due to the sharp increase in Nominal Growth, which in turn is due to the high inflation. If inflation comes off as you expect (leading to positive real rates currently), Govt interest exp will start bcoming higher than the nominal growth of economy. That would prob turn the Debt/GDP number higher... A recession & the subsequent stimulus probably will make the number worse? This is probably why Fitch did what they did...
If California is 15% of tax receipts and Federal Tax reciepts/GDP is about 20%, would be it fair to say the California situation let to 3% additioanl fiscal deficits. I believe we are running at 7-8% fiscal deficit/GDP currently, so adjusting for that we would be running at 3-4% ?? Isnt that considered high still?
So by that logic, we should start seeing faster cracks in the economy with California tax payments and the student debt situation...recession in Q1 2024?
$1.7T including Education. So ~$1.3T excluding the accounting story. Add in CA impact and we're well less than nominal GDP growth at 5% trailing.
And I'd argue cracks likely start when CA payments stress the money market/bank balances in October. A similar story to Q4 2019 when large tax payments had a similar impact on funding markets.
Mike, your post presents a convincing argument that the debt doesn't matter right now, but what about in the future? I'm one of the many Boomers who is now on Medicare and have been fortunate enough financially to be able to wait to file for Social Security, but I'm going to do it when it doesn't make financial sense to wait anymore. Given the size of my demographic cohort won't this matter eventually?
The debt, specifically the debt, doesn’t actually matter. It’s the allocation of resources that the debt entails that matters.
Caring for “senior citizens” (a term that didn’t exist until the 1930s) is, without judgement, a drain on societal resources unless (1) demonstrating the commitment to supporting those in their old age encourages active participation of the young in the expectation of similar treatment or (2) the subsidy encourages those citizens remain productive members of society. Caring for grandchildren, volunteer activities that support the community, etc are all mechanisms that can enrich a society far beyond the cost of support.
But the extraordinary “support” we currently offer to the aged AT THE EXPENSE of the young and working age is insane. Hip replacements for 85 year olds is an absurd use of public resources. You should be absolutely capable of acknowledging this without being accused of ageism.
That the deficit has exploded on an accounting treatment of ridiculous student loans should help us to understand what a terrible job we are doing in resource allocation. That no one seems to want to do the work to identify WHY the budget deficit exploded is possibly the most concerning aspect of this episode for me.
Agree. But funny you mentioned hip replacements. My best friend had his done just before he went on Medicare, but that was so he could continue working as a productive member of society. He kept putting it off, so if the timing of when his pain that forced him to go in for surgery had been later, it could have been when he was on Medicare in which case, I would think that the expense would be justifiable, as he wants to keep running his business until he's too old to do it.
I’m obviously not against hip replacements! And anyone who is still working is, by definition, a productive member of society. Whether his hip replacement should have been subsidized versus someone a year younger is one of many arguments for why healthcare should have a larger role in public resources across age groups.
So the fiscal impulse charts that JP and gs have sent around need to be revised a lot lower. How does one reconcile lack of fiscal Impulse and the economy holding up well.
I would speculate that consumer spending is being held up by a surge of Boomers that are retiring because they have been once again reminded that stocks always bounce back, fueling retirement splurges. Life transitions are expensive. I would also speculate that this trend is as durable as the S&P’s latest print.
Just a vote, that the bonanza from California tax receipts will be muted by limited capital gains in calendar year 2022 and taking write-offs for calendar year 2023.
The Atlanta Fed GDPNow has a strange parentage. The initial starting point is determined by a lagged linear regression estimated using 5 quarters of GDP data. I'll illustrate in this week's note.
So if there was a recognition of the expense of loan cancellation in FY2022, does the reversal of that expense get recognized all at once or do we accrete that back with narrow than expected budget deficits in future periods?
Sounds pretty logical for the USA. There is a story that the 1929 crisis started in Austria. What if... a crisis starts elsewhere. The poverty in UK outside London. The weak rouble leads to Russian desperation. Collateral for the derivatives. German manufacturing. China debt collapse. It is all so complex and inter-related. It is the serenity prayer thing? Stay within your circle?
Just wondering out loud... Debt/GDP coming off is probably due to the sharp increase in Nominal Growth, which in turn is due to the high inflation. If inflation comes off as you expect (leading to positive real rates currently), Govt interest exp will start bcoming higher than the nominal growth of economy. That would prob turn the Debt/GDP number higher... A recession & the subsequent stimulus probably will make the number worse? This is probably why Fitch did what they did...
If California is 15% of tax receipts and Federal Tax reciepts/GDP is about 20%, would be it fair to say the California situation let to 3% additioanl fiscal deficits. I believe we are running at 7-8% fiscal deficit/GDP currently, so adjusting for that we would be running at 3-4% ?? Isnt that considered high still?
So by that logic, we should start seeing faster cracks in the economy with California tax payments and the student debt situation...recession in Q1 2024?
$1.7T including Education. So ~$1.3T excluding the accounting story. Add in CA impact and we're well less than nominal GDP growth at 5% trailing.
And I'd argue cracks likely start when CA payments stress the money market/bank balances in October. A similar story to Q4 2019 when large tax payments had a similar impact on funding markets.
Could this be the justification for massive fiscal in 2024? Everyone gets to be the hero into the election.
Mike, your post presents a convincing argument that the debt doesn't matter right now, but what about in the future? I'm one of the many Boomers who is now on Medicare and have been fortunate enough financially to be able to wait to file for Social Security, but I'm going to do it when it doesn't make financial sense to wait anymore. Given the size of my demographic cohort won't this matter eventually?
The debt, specifically the debt, doesn’t actually matter. It’s the allocation of resources that the debt entails that matters.
Caring for “senior citizens” (a term that didn’t exist until the 1930s) is, without judgement, a drain on societal resources unless (1) demonstrating the commitment to supporting those in their old age encourages active participation of the young in the expectation of similar treatment or (2) the subsidy encourages those citizens remain productive members of society. Caring for grandchildren, volunteer activities that support the community, etc are all mechanisms that can enrich a society far beyond the cost of support.
But the extraordinary “support” we currently offer to the aged AT THE EXPENSE of the young and working age is insane. Hip replacements for 85 year olds is an absurd use of public resources. You should be absolutely capable of acknowledging this without being accused of ageism.
That the deficit has exploded on an accounting treatment of ridiculous student loans should help us to understand what a terrible job we are doing in resource allocation. That no one seems to want to do the work to identify WHY the budget deficit exploded is possibly the most concerning aspect of this episode for me.
Agree. But funny you mentioned hip replacements. My best friend had his done just before he went on Medicare, but that was so he could continue working as a productive member of society. He kept putting it off, so if the timing of when his pain that forced him to go in for surgery had been later, it could have been when he was on Medicare in which case, I would think that the expense would be justifiable, as he wants to keep running his business until he's too old to do it.
I’m obviously not against hip replacements! And anyone who is still working is, by definition, a productive member of society. Whether his hip replacement should have been subsidized versus someone a year younger is one of many arguments for why healthcare should have a larger role in public resources across age groups.
Thanks Mike! I misunderstood you obviously :) and I apologize if I in any way offended you.
Takes a pretty concerted effort to offend me. Appreciate your participation
So the fiscal impulse charts that JP and gs have sent around need to be revised a lot lower. How does one reconcile lack of fiscal Impulse and the economy holding up well.
Yes. I am surprised others have not caught this yet.
I think the answer is that the economy is holding up less well than we acknowledge, but we’re distracted by low unemployment and high S&P
I would speculate that consumer spending is being held up by a surge of Boomers that are retiring because they have been once again reminded that stocks always bounce back, fueling retirement splurges. Life transitions are expensive. I would also speculate that this trend is as durable as the S&P’s latest print.
Just a vote, that the bonanza from California tax receipts will be muted by limited capital gains in calendar year 2022 and taking write-offs for calendar year 2023.
Google alone has over $9B in a money market account tagged “For Gavin, With Love”
Late comment here, but great post anyway. Thanks!
And here’s a request to shed some light about the Atlanta Fed GDP Now currently showing 5% growth this quarter!?!?
A. How credible and reliable is this estimate?
B. How do they get that percentage ?
The Atlanta Fed GDPNow has a strange parentage. The initial starting point is determined by a lagged linear regression estimated using 5 quarters of GDP data. I'll illustrate in this week's note.
So if there was a recognition of the expense of loan cancellation in FY2022, does the reversal of that expense get recognized all at once or do we accrete that back with narrow than expected budget deficits in future periods?
The expense will be reversed all at once. California taxes, likewise, will show up as an unusual inflow.
Sounds pretty logical for the USA. There is a story that the 1929 crisis started in Austria. What if... a crisis starts elsewhere. The poverty in UK outside London. The weak rouble leads to Russian desperation. Collateral for the derivatives. German manufacturing. China debt collapse. It is all so complex and inter-related. It is the serenity prayer thing? Stay within your circle?
Great article! The myth buster of the financial sector!