The Big Beautiful Bill (B3) has been signed into law, calling into question the long term impact to the economy. B3 has the government spending much more money than it takes in, collecting $5 trillion in taxes and other revenue against $7 trillion in spending per year. This $2 trillion difference gets added to the national debt every year. Right now the U.S. government pays $1 trillion in interest each year. This could double with even higher principal payments when bonds mature.
Should debt payments grow out of control to unsustainable levels, the government can pull levers like spending cuts, money printing and keeping interest rates artificially low, which are in aggregate generally bad for the economy, inflation and investors.
Historical evidence shows that countries with debt-to-GDP ratios above 90-100% frequently experience economic crises. The U.S. faces similar risks as high debt payments move funding away from essential services while creating extreme vulnerability to interest rate increases that dramatically multiply borrowing costs. Future generations therefore inherit massive obligations and risks of a market confidence crisis where bond investors lose faith in America’s ability to repay.
But what are some of the counter arguments to the doom and gloom? It’s never a bad idea to try and understand both sides of any debatable topic.
One can argue that the U.S. has advantages that other indebted nations don’t enjoy, which could’ve been part of the rationale of the policy makers who passed the B3.
For one thing, the U.S. dollar's reserve currency status is like no other and provides exceptional borrowing privileges. And America has the world's largest and most innovative economy, giving it persistent high growth potential combined with a track record of growing out of debt after WWII when debt-to-GDP exceeded 100%.
And if economic growth continues to exceed interest rates, debt can become more manageable, while productive government investments in infrastructure, R&D, and education boost long-term growth.
Finally, America has political flexibility through immigration and other regulatory measures that could stoke economic growth beyond present projections.
On one hand the current trajectory appears to be unsustainable. On the other, America’s unique economic position seems to give it more of a fighting chance than other countries would have in similar situations. I guess time will tell.
“Seek first to understand, then to be understood.” — Stephen R. Covey
Stayed tuned next week as we cover the potential implications of the B3 on undervalued investments across near, mid and long-term horizons.
P.S. I'm sharing some investment information, but it's important to remember that what I'm providing is for informational purposes only and should not be construed as financial advice.
Happy Investing,
John
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