Trump Avoid Debt Crisis? “Extremely Unlikely” says Rickards

The upcoming March 15 U.S. debt ceiling deadline is something that is being largely ignored by markets and most media for now. Despite it being just 9 trading days away. This will change in the coming days and is one of the many reasons why we are bullish on gold.

Source: CNN

James Rickards writing for the Daily Reckoning today looks at the important ‘next signal to watch’ and explains that Trump and his advisors believe they can avoid a debt crisis through higher than average growth.

The Congressional Budget Office, CBO, estimates that inflation and real GDP will each grow at about 2% per year in the coming ten years. This means that nominal GDP, which is the sum of real GDP plus inflation, will grow at about 4% per year. Since debt is incurred and paid in nominal terms, nominal GDP growth is the critical measure of the sustainability of U.S. debt. 

Rickards warns that while this is “mathematically possible”, it is “extremely unlikely”:

“A debt-to-GDP ratio is the product of two parts — a numerator consisting of nominal debt and a denominator consisting of nominal GDP. In this issue, we have focused on the numerator in the form of massively expanding government debt. Yet, mathematically it is true that if the denominator grows faster than the numerator, the debt ratio will decline.

The Trump team hopes for nominal deficits of about 3% of gross domestic product (GDP) and nominal GDP growth of about 6% consisting of 4% real growth and 2% inflation. If that happens, the debt-to-GDP ratio will decline and a crisis might be averted.

This outcome is extremely unlikely. As shown in the chart below, deficits are already over 3% of GDP and are projected by CBO to go higher. We are past the demographic sweet spot that Obama used to his budget advantage in 2012–2016 (As I noted HERE – Obama Has Tied Trump’s Hands).”