Eric Basmajian Profile picture
Sep 9, 2022 25 tweets 9 min read Read on X
The US Government is bankrupt.

By 2032, entitlement spending plus interest on the debt will be 100% of tax revenue!

This has massive implications for the economy...but it's not what you think.

Let's see where this is heading 👇

(Hint: It's not hyperinflation)

1/25
The Federal Government has about $31 trillion in debt on $25 trillion of GDP.

This ratio of ~125% debt to GDP is the highest in US history, and it's only set to get worse.

2/25 Image
Government spending has steadily increased over the last 50 years.

In the 1960s, government spending was equal to roughly 28% of the economy.

Today, government spending is averaging 37% of GDP.

3/25 Image
Not only has the government been spending more, but the composition of the spending has radically changed.

In the 1960s, about 75% of spending was "discretionary," and 25% of spending was "mandatory."

Mandatory spending is basically entitlements + interest on the debt.

4/25 Image
Today, the ratios have completely flipped.

Mandatory spending is 75%, and discretionary spending is 25%.

This is only set to get worse as this mandatory spending (entitlements) is going to balloon as all the baby boomers age past 65.

5/25 Image
By 2032, by the government’s own projections, this mandatory government spending will be 100% of tax revenue.

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In the 1960s, about 25 cents of every dollar the government spent came from borrowing, and 75 cents was funded with taxes.

Today, 60 cents of every dollar the government spends has to be borrowed.

Due to the entitlement programs, these borrowing needs will increase.

7/25 Image
Taxes have been creeping higher, rising from about 25% of GDP to 28% of GDP but raising taxes isn't politically popular.

The path of least resistance is to simply issue more debt. So more debt is likely the way forward.

What does that mean?

8/25 Image
We have to look at net national savings.

Net national savings includes government savings, private savings, and foreign savings.

The combination of the savings from all these areas is net national savings.

9/25 Image
In the 1940s, the government ran large deficits (negative savings), but net national savings was very high, in the 12% range

The private sector ran massive savings (almost 30%)

The economy had a lot of savings for future investment/debt reduction in the post-war period.

10/25 Image
Over the last several decades, the rate of net national savings has been in free fall, declining from 12% to just 3%.

The government is running huge deficits and the private sector simply cannot save enough to offset the government dissavings.

11/25 Image
We know that budget deficits will continue to grow, & this government dissavings must be met with higher private saving or a larger trade deficit

If households don't want to save more (consume less) & the trade deficit cannot grow larger, then private investment will tank

12/25
Many people believe the Fed, through QE, can be a source of economic savings.

This is not the case.

The Fed can change the nature of government liabilities from long-term to short-term, thereby reducing interest expense, but the Fed cannot be a source of savings.

13/25 Image
So what’s going to happen is the net national savings rate is going to fall, & this will manifest in two ways.

First, the trade deficit will get wider (to some extent), & second, is that private sector investment will fall

Investment means physical investment, not stocks

14/25
This chart shows private investment (structures, equipment & residential construction) as a share of GDP.

It has fallen from 16%-18% down to 12%.

Investment generates new sources of income and productivity, allowing the economy to make improvements in the quality of life

15/25 Image
Looking at just structures & equipment, the picture is even worse.

This includes hospitals, water systems, power plants, electrical grids, industrial supplies & more.

An economy does not advance through consumption or government spending but only through investment

16/25 Image
Think about the stories we hear today about water systems breaking down, air transportation cancellations, and electric grids failing, and then think about the lost productivity of these events compounding year after year. It really adds up over time.

17/25
In the 1980s, we spent 12% of GDP on these areas compared to 8% today. That would be the equivalent of an extra $1T/year that we could spend on improving the efficiency of the country's infrastructure & making productivity gains if we had sufficient savings. But we don’t.

18/25 Image
All our resources are going towards unproductive transfers.

In the 1960s, 15 cents of every dollar the government spent went towards transfer payments. Today it's nearly 50 cents.

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This all sounds like the USD is doomed, but we have to remember it's a relative game.

Doomed vs. what? Vs. who?

IMF data shows public & private debt in Europe, China, and Japan is much higher than in the US.

20/25 Image
Also, every major nation is a demographic disaster. The US doesn't have great demographics, but we have less debt and better demographics than everyone else.

By a lot.

21/25 Image
So the result has been a booming US Dollar, even with all the problems I just outlined, and the results going forward will look very similar.

More government borrowing, wider trade deficits, lower national savings, and lower productive investment in critical areas.

22/25 Image
The failure to sustain productivity-enhancing investment will cause real GDP growth to continue collapsing.

Sustained 2% growth is a thing of the past

The economy will become anemic without government assistance

1% or even 0% rates of real growth will be the new normal

23/25 Image
If you liked any part of this thread, please give me follow @EPBResearch for more content like this.

Follow: twitter.com/EPBResearch

24/25
Also, check out this entire thread in video form on my YouTube channel!

I'm a visual guy, so I always think the videos are better than the threads.

Watch Video Here:

Thanks!

25/25 Image

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More from @EPBResearch

Mar 31
The labor market is holding together on the surface, but concerning details appear under the hood.

No quitting and no hiring, but also no firing yet.

Here's the real story behind the US labor market.

1/
To start, the health and vibrance of the labor market comes from the goods economy of construction and manufacturing.

So this is where we focus.

If you need a primer on why, check this out:

2/
When we look at the BLS employment report, the combination of construction & manufacturing continues to increase.

If these cyclical jobs were declining, that would be a major step towards recession.

So far, they are increasing, which is a good thing.

3/ Image
Read 14 tweets
Mar 17
Real retail sales are now lower than the pre-pandemic trend line.

Real sales volume has moved sideways for over two years!

Is the consumer in trouble?

1/ Image
Retail sales are reported in nominal dollars, or including inflation.

Historically, retail sales increased at a 4.2% annualized pace.

About 2% of that was price, and 2% was unit growth.

2/ Image
The COVID demand shock happened, and retail sales exploded, rising 17% above trend by the summer of 2022.

3/ Image
Read 10 tweets
Mar 6
Q1 GDP growth is estimated at -2.4% per the Atlanta Fed.

Is a recession hitting now?

Here's what's actually going on 👇

1/ Image
First, the Atlanta Fed GDPNow model is a rolling estimate that gets better with more data.

So at the start of a quarter, the model is mostly estimates and the GDP output is not accurate.

As the estimated data gets replaced with real numbers, the model is more accurate.

2/
Secondly, GDP is comprised of four major components:

1) Personal consumption
2) Investment
3) Government Spending
4) Net exports

A recession is driven by categories 1 & 2.

3/
Read 12 tweets
Feb 22
Durable goods are the most high-powered, high-velocity area of personal spending.

This includes:

- Motor vehicles & parts
- Home Furnishings
- Recreational Vehicles

We still haven't fully reversed the surge of durables spending after the pandemic.

Here's why it matters.

1/ Image
The economy has four primary categories:

- Private consumption
- Private investment
- Net exports
- Government spending

2/ Image
The "Duncan Leading Index" involves tracking three narrow segments of the economy:

- Durable goods consumption
- Residential investment
- Non-residential investment

3/ Image
Read 10 tweets
Feb 12
The heavy truck sector is at a critical point.

Right now, truck sales are stable, but truck production is tumbling.

Here’s the story in the truck sector, why you should follow it, and why it matters.

1/
One of the most important economic indicators is vehicle sales.

The economy runs on housing and vehicles because both have a major consumption and production cycle.

These are also large, financed purchases, meaning they are highly influenced by monetary policy.

2/
This makes housing and vehicles highly responsive to changes in interest rates, often serving as a leading indicator.

We recently covered housing as a leading indicator through new home sales.



3/
Read 17 tweets
Feb 6
New home sales are one of the best leading indicators of the broader economy.

Right now, new home sales are at a critical juncture.

Here’s what’s happening and why it matters for the rest of the economy.

1/
New home sales tend to peak and roll over before the broader economy enters a downturn.

This happened in 2005 before the housing crisis.

2/ Image
It also happened in advance of 1991, signaling a slowdown before the recession officially began.

3/ Image
Read 12 tweets

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