Moneybeat – Record-breaking federal debt

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Financial analyst and advisor David Bahnsen joins us now. 

And this week, David, I’m going to ask you to choose. I’m not sure what was the big economic story of the week—lots of smaller stories—but to you what was the big story?

DAVID BAHNSEN, GUEST: I actually would probably have a surprising answer because I think that the oil price movement is the biggest economic story of the week. Now, most people right now are focused on the direction of the stimulus bill. You had a good week in the stock market. There were a couple of up days, a couple down days. But it’s hanging in there at all-time highs. The focus on impeachment was not at all a story. 

But the oil price story is all at once geopolitical and certainly related to the COVID story, because you have oil prices now that have come back to their pre-pandemic highs. You have global demand expectations were kicked down a couple hundred thousand barrels a day this week. That’s not a lot, but it isn’t like demand expectations are skyrocketing higher. 

You just have supply-demand fundamentals working where most countries with OPEC-plus have down-ticked the supply they’re putting in the global market. And then you have the U.S., working out of economic realities, went from 670 rigs a year ago down to 175 by August. We’re back up to 275, so our production’s coming back a bit, but it’s still less than half of where it was a year ago. 

Why is this a big economic story? Well, oil is related to the dollar. It’s related to economic growth. It’s obviously related to COVID as we look at what we expect from the economy domestically and globally on the other side of the pandemic. So, I think it covers a lot of things and it doesn’t really get a lot of attention. But I’m watching it very closely.

EICHER: And bottom line, it’s good news. Whenever oil recovers, that just means we’re back into economic activity.

BAHNSEN: So, this is what’s interesting, Nick, because you’re right. Oil prices have moved higher in a good-news sense because we now expect, you know, more demand than we did when the world was shut down, OK? So that’s good news. 

Here’s the problem: The analogy I used this week on a client call is it’s like if you let your swimming pool get freezing and then your kids want to go use it. And so you say, OK, I’m going to turn it on to heat it. That thing is not heating up in time for them to use it, right? It can take a few days. We can’t just turn on our supply again and all of a sudden have it catch up to demand. I do think the bad news is that we risk $80 or $90 oil, simply because our ability to get our production back on has a tremendous lag effect and if supply and demand fundamentals get there, I think we’re going to end up going the other direction. 

So, finding perfect equilibrium is always tough. But I agree with you it’s good news right now, but I expect we’re going to end up getting into like too expensive of oil, which will impact gas prices, home heating bills, and so forth. So, there’s a lot to watch here.

EICHER: Let me jump to this debt report from the Congressional Budget Office—the CBO. Strikes me as bleak. It shows how in very short order we hit 100 percent debt-to-GDP ratio, meaning the United States government has amassed as much debt as the entire economy produces in one year’s time. It’s a very good economic measure because it shows relative strength or weakness and it’s pretty sobering stuff because the CBO is projecting we’ll hit 107 percent debt-to-GDP. 

Now, just quickly, I want to acknowledge what you said last week about Republicans who were very quiet the last four years while piling up debt, all the sudden getting religion on this issue when the Democrats take over.

But looking at the line on the graph, I guess it could be worse, but it’s shocking to look at. As recently as 2008, before the financial crisis, the debt-to-GDP ratio was 40 percent. Now we’re talking about 107 percent.

I’ve received several emails from listeners asking us to address the debt and now we have this CBO report to give us the opportunity.

BAHNSEN: Yeah, I think that the CBO number was intended to be good news, like they were setting the table to try to get ready to justify the new — that 107 does not include the new Biden stimulus bill, OK? And 107 percent is high by American standards, but it’s really low by global standards right now. Many European countries are running at 175 percent, 160 percent. Japan has been running at well over 200 percent for a long time. The U.S. is not back to its post-World War II percentage of GDP, but it will get there. 

So, there’s no good news in it. I don’t consider it good news that the United States debt level is not as bad as a lot of other countries. The global debt level is a problem, too. We do not live in an isolated U.S. economy, and so I think the debt stories need to start with our own. That’s the only one we can really control. But economically you have to really be following it globally as well. 

The issue is that we’re going to be going higher. It’s not where it is right now, and so I’m very much of the mindset that we will spend what we will spend through this pandemic. It will get justified the way it gets justified. I will have no tolerance for the Republicans that will talk about how inefficient it is. And it’s not because the Republicans that supported the CARES Act and other things that were legitimate when we were in the worst part of the pandemic. It’s because of the trillion dollar plus deficits we had before the pandemic. You cannot run your financial situation like you’re in an emergency case when you’re not in an emergency case. And then have the dry powder you need for when you do have an emergency case. 

And so my belief is that those deficits will end up getting to 130-140 percent of GDP and it will be the pretense for them setting up for a tax increase after the midterms if the Democrats are able to hold the House.

EICHER: So let’s talk about this—what it means to live with this level of debt. I remember when we first started talking about the original CARES Act response to the pandemic—many months ago—I raised the question of debt and at the time I made a careless comment—for which you took me to task, big time.  

I think it was something along the lines of “Oh, boy. Venezuela, here we come.” And you warned me, don’t say that. That’s not the case. Living with big debt has different effects. But I think what you said bears repeating and it’s been a while since we talked about it.

BAHNSEN: Yeah, and I’d forgotten that you had said it. I’m glad you reminded me because otherwise I would have been unduly harsh in my treatment of people who say things like that. But since I know it’s you, I’ll be really nice. 

Those analogies really hurt the cause because they’re so untrue. The U.S. is not Venezuela in any way, shape, or form. Our currency is not Zimbabwe in any way, shape, or form. We actually do have real output. We have real productivity. We have real capacity. We have real innovation, educational system. So there is this blessing. Now, we’re squandering it. We’re not stewarding it well. We’re messing it all up. There’s going to be consequences. 

But the analogies to things like Venezuela and Zimbabwe, they turn everybody off to the real threat because everyone intuitively knows we’re not about to become Zimbabwe, so then they figure it sounds almost like a boy who cried wolf thing. 

You asked what it’s like to live with debt. I would suggest that what it’s like to live with debt for a country, a massive country with massive earning capacity but a whole bunch of debt is very similar to a high earning family with a whole bunch of debt. They are making money and they’re servicing the minimum payments and they’re moving things around and they’re refinancing, and they’re not falling into the ocean. But they’re never getting ahead. 

So, debt is future growth brought into the present and the same thing is true of our country. 

So, you play it out for our kids and grandkids, they’re going to be dealing with that dynamic. That’s what it’s like. Now, what I just described is awful. But what I didn’t describe is Zimbabwe, Venezuela, falling in the ocean, all that. And so a lot of people either want to hear this doom and gloom thing, and my message is not sensationalistic enough to get a lot of ears, so then people don’t listen to it and then we just keep going. That’s my assessment of this stuff, Nick.

EICHER: Always helpful. David Bahnsen, financial analyst and advisor. Great to talk with you. We’ll talk again next time. Thanks so much.

BAHNSEN: Thanks, Nick.

(AP Photo/Seth Wenig) A street sign is displayed at the New York Stock Exchange in New York, Monday, Nov. 23, 2020. 

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