Message For Bond Investors: Don't Fight Financial Repression

The Congressional Budget Office (CBO) released two supplemental reports this month—the first reveals budget scenarios it “did not have enough time” to include in June’s 2018 Long-Term Budget Outlook, and the second shows what needs to happen for policy makers to reach certain government debt targets.

I plan to post a few charts summarizing the new reports, but because I’m sounding off on bonds for now (or in a moment) and don’t need all the detail to support my argument, I’ll share only a short summary of the first report.

The CBO Swallowed the Red Pill, and Here’s What Transpired

In its report titled The Long-Term Budget Outlook Under Alternative Scenarios for Fiscal Policy, the CBO produced three scenarios that didn’t make the publication deadline for its primary long-term outlook. In a more honest world, though, the order of publication would have been reversed—the primary report would have contained only the new scenarios. By building the new scenarios on well-established lawmaking practices that are disallowed in the primary report’s “baseline” scenario, the CBO is finally nudging toward a realistic estimate of our government debt trajectory. The new scenarios address the problem that the baseline is so heavily gamed by devious lawmaking and compromised by shoddy economics that it falls somewhere between unhelpful and fraudulent.

Does that sound extreme? Too radical for you?

If you’ve studied the baseline methodology with any seriousness and yet insist on defending it, I know of a guy in the electric car business who’d like to talk to you about financing. Seriously, though, the baseline’s deficiencies are glaring, which is why a growing number of analysts are writing about them while producing their own debt projections. (Here’s an example from Goldman Sachs and Zero Hedge, and you can find my projections in my book, which includes analysis of all historical episodes of governments running debt as high as America’s today, and in blog posts here and here.)

But if you’re not a sucker for establishment narratives, I have three numbers for you, one for each of the supplemental report’s new scenarios. The numbers tell us where America’s debt-to-GDP ratio might be at the end of the CBO’s 30-year projections, but they were buried in the report’s last paragraph and appeared nowhere in the charts. To explain their omission from the rest of the report, the authors pointed out that the numbers rely on uncertain assumptions that are probably too optimistic. And the stated reasons for excessive optimism don’t even include two points commonly cited by CBO critics (for more discussion, see the second of my blog posts linked above):

  • The figures are built on a blissful economic future marked by improving productivity growth and a 30-year average unemployment rate lower than America has ever recorded.
  • The figures exclude debt owed to the Social Security and Medicare Trust funds.
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Disclosure: I own government bonds within a diversified portfolio.

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