U.S. Credit Crunch & Johnson’s Plan - Top 3 Takeaways – November 13th, 2023
- A negative outlook. It’s not my intention to begin the week on a literally negative note, however it just so happens to be the case that last week ended on a decidedly negative note in the financial markets. No, it wasn’t reflected in the stock market, which, had another big day wrapping up two consecutive weeks with impressive gains. But, it is news which has the potential to hit in a big way economically going forward. The credit ratings agency Moody’s has once again downgraded the outlook for the U.S.’ debt...this time the outlook is “negative”. The focus of most reporting has centered around the brewing battle this week in Congress over a potential debt spending deal, which if not struck by Friday, could result in a partial government shutdown. The fact of the matter, however, is that a partial shutdown is the least of the country’s debt problems. The most important note offered by Moody’s was in regard to something I spoke of earlier this year following a downgrade from Fitch. As noted... The only thing less fun than talking about personal debt is likely talking about the country’s debt. But debt matters. Anyone who has ever had any, which is almost everyone, knows this. But seemingly, throughout the course of all of our lifetimes, no matter how high US deficits were or how large the federal debt became, it really didn’t seem to matter. At least not on a personal level anyway. Except that was always untrue. Federal deficit spending and the US National Debt have always impacted us all of the time. It's just that until we began to experience 40+ year high inflation, driven in large part by federal debt spending, not many people knew this and even fewer noticed. Interest rates and economic growth have always been directly influenced by debt and deficit spending by the federal government. And now, following an inflation crisis brought about by artificial demand fueled by federal debt spending, which we’re still in the process of attempting to recover from – there are even bigger issues on the horizon as outlined by the credit ratings agency Fitch. Our federal debt and deficit is not different than personal debt and deficit spending.
- It works, until it doesn’t. In the case of personal debt, you’re able to spend freely accumulating debt for as long as lenders will continue to extend credit to you and for as long as you can manage to meet the minimum monthly payments. The federal government is no different. Yes, they can print money at will (or digitize it as the case happens to be), but there are consequences for doing that which work similarly to personal finances. Diluting the existing monetary supply with more money makes existing dollars worth less, raising the rate of inflation, which leads to higher interest rates, which raises the cost for the federal government to service the existing debt the Treasury Department is making monthly payments on as well. This is the very cycle our country has found itself in. And perhaps then it’s no surprise that with having experienced 40+ year high inflation amid record deficit spending and a record National debt that’s rapidly rising we’re starting to see signs of financial stress within our system. Fitch cited: “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters. Cuts to non-defense discretionary spending (15% of total federal spending), as agreed in the Fiscal Responsibility Act, offer only a modest improvement to the medium-term fiscal outlook”. In other words, our reckless out of control federal spending is becoming unsustainable. On Friday when issuing the downgrade Moody’s said this: In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US fiscal deficits will remain very large, significantly weakening debt affordability. Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability. The crux of the coverage to date has largely been focused on the political considerations of a potential partial shutdown, which if you noticed, almost entirely isn’t the point. Both Fitch months ago, and Moody’s on Friday clearly have indicated that the biggest problem we face isn’t whether there will be an agreement to keep the status quo in place or not. The biggest problem we face IS the status quo spending problem we’ve got. Moody’s could have not been more clear in the need for the United States to dramatically reduce debt spending going forward. On that note...
- Enter Mike Johnson’s plan. The first major test of Mike Johnson’s leadership as House Speaker has come quickly. And what he’s proposed in his spending plan to attempt to avoid a potential partial government shutdown is in fact a bit different than what we’ve seen. The two-tiered approach includes one piece that’s entirely the same as what we’ve seen. He’s proposed a continuing resolution for most government spending, which is broadly agreed to on both sides of the political aisle, that would do what we’ve been doing through January 19th for some programs and February 2nd for others. The second piece would be whatever is decided by those deadlines. Now here’s the irony of this plan, if it sounds like it’s almost exactly what Kevin McCarthy did that led to his ouster, that’s because it is. He said he’s only had a short time on the job, and this is effectively the best he could do – which incidentally is exactly what I warned of when McCarthy was ousted originally, and Johnson installed as speaker most recently. Quoting myself... Democrats control two-thirds of the Federal government. Expecting McCarthy to act as hardline ideologue as opposed to a conservative pragmatist is unrealistic. If you want more conservative policies in Congress – win more elections. Because Republicans didn’t win more elections last year – especially in the Senate – compromised policy is the only policy that exists in this Congress. It is literally the only policy that can exist. And that’s the reality in which House Speaker Mike Johnson will now have to operate within. If you squint you might be able to try to make the case that Mike Johnson kinda, maybe, possibly is ever-so-slightly more conservative than Kevin McCarthy, but the fact of the matter is that he’s not really an upgrade from that perspective and that’s no fault of his own. It will not be his fault when he necessarily negotiates and legislates like his predecessor did – which is what must happen when you only hold a third of the power. Lost weeks working on and negotiating over a new spending bill with a looming November 17th deadline is significant too. Already conservatives Chip Roy and Marjorie Taylor Greene have come out in opposition to this. It’s likely that if brought to a vote on the floor as is, it will pass with a vote that could be similar to the vote on McCarthy’s last one with many conservatives voting against it and many Democrats voting for it. The closest thing to a “win” for fiscal restraint is that the bill doesn’t include any additional spending including for President Biden’s plan for over $100 billion additional dollars to fund foreign wars, mostly Ukraine. No new spending is the dividing line politically here. So, when you hear Democrats, including the president take shots at this – that's where they’re coming from. When you hear conservatives complaining about continuing with Nancy Pelosi’s spending plan from a year ago, they’re right. When you hear Moody’s and Fitch indicating that we’re continuing down a "negative” spending path, they’re right. And as you’ll occasionally hear me say...I’ve not made a career out of being wrong. We’ll see where this goes this week, which will hopefully be a positive one – if for no other reason than with each of us controlling what we can control to make it that way. May God bless you and our country. We and it always need it.