Other Thoughts on Inflation & Debt - October 2023

In my May 2023 letter, I probably went more into detail on debt and inflation than many of you care to read.  Well, when the momentum starts with this rock rolling downhill, no force has yet slowed down my thinking on the subject.  I have more thoughts worth sharing as they impact your financial plan.

A Fascinating Chart on Inflation.

If you will indulge by sparing a second and looking at the chart below.  This is a truly interesting chart showing prices of certain goods and services along with the Consumer Price Index (“CPI”) and the M2 money supply across the same period.

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It really shows that you can think about price inflation as a spectrum. Lynn Alden, an economic researcher I follow closely, put it best saying scarce, energy-intensive, and labor-intensive things tend to rise in price more quickly than CPI.  Deflationary things with rapid productivity growth on the other hand pull down CPI growth.  This chart perfectly illustrates this point that the CPI basket is pulled down by certain technological improvements, such as computers.  The cost for a house, healthcare, a college education,  and childcare have exceeded wages and CPI.  On the other hand, electronics, software, textiles, and plastics, have had a productivity boom and under-paced CPI.  This makes sense when you look at the classic example of what a flatscreen tv cost in 2000 vs 2023.

That’s it… an interesting chart worth sharing that echoes some thoughts from my May 2023 Letter.

Additional Thoughts on The National Debt

1. Refinancing Is Going to Be Problematic

In the next 12 months, about $7.5 trillion in federal debt matures.  Obviously, the U.S. Treasury doesn’t have $7.5 trillion laying around, and the maturing debt will need to be refinanced or rolled over and sold to investors again.  This older maturing debt mostly has an interest rate less than 2.5% and will have to be re-issued with rates closer to 5%.  That’s great for savers and those buying bonds, but it’s not good for fiscal deficit of the country.  The U.S. Treasury is already running deficits in the trillions of dollars (federal expenses in excess of tax receipts) and this will only add to that strain.  Interest expense as a percentage of federal expenditures is moving higher at a higher pace than we have seen over the last decade or so.

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2. Spending Beyond Interest Expense Is Not Great Either…

For the 2022 budget year, the U.S. government ran a $1.38 trillion deficit.  In 2023, a post-pandemic year where spending should be more nominalized, another $2 trillion in debt has been added in the five months since I drafted my May letter raising the national debt to $33.6 trillion.  Multi-trillion-deficits are becoming normalized even when there is no global financial crisis or global pandemic.

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3. Off Balance Sheet Liabilities.

Government accounting is weird.  I’ve thought that since the hot days of summer 2010 kicking off my Masters of Accountancy with the specialty course of “Government Accounting.”  In short, the U.S. government has extremely limited reporting obligations to accrue for future liabilities.  If a business had a future obligation of $1 billion to fund pensions and health care costs of retired employees, you would see their financial reporting reflect that liability.  A government has no such obligation, and expected future Medicare and Social Security costs in excess of $103 trillion are not reported in the U.S. national debt figures.  Yes, a government that can print its own money is a little different than a corporation, but nevertheless the accounting treatment feels wrong when trying to bring focus to the financial condition of a nation.

Regardless of my personal opinion on the less than clear accounting, it’s unquestionable that future liabilities exist and they are massive.  If the $103 trillion estimate is correct, that is almost 4x GDP (the annual economic production of the United States).  More dollars will need to be created and the dollar will likely have to weaken to fund these promised costs.

I hate leave you all with such somber thoughts. I try to stay as up-to-date as possible to best serve your financial planning needs. These are factors we continue to track and consider when modifying your financial plan. As always, I love discussing these topics, so please let me know if you have any questions.