SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
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SKEPTIC’S GUIDE TO INVESTING
Is the U.S. National Debt Unsustainable (with Special Guest Steve Gattuso, CFA)
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Prepare to demystify the complexities of the national debt with our esteemed guest, Steve Gattuso, CFA, Chief Investment Officer at Courier Capital. This episode of Skeptic's Guide to Investing promises to shed light on how the national debt has reached nearly $35 trillion and what this means for our economic future. Steve uses relatable analogies to break down the difference between deficit and debt, while also discussing the significant impact of mandated spending on social programs and the looming 2025 sunset of the Tax Cuts and Jobs Act.
Steve offers a deep dive into U.S. debt holdings, differentiating between domestic and foreign holders, and examines the potential repercussions on economic stability. We discuss the Federal Reserve's pivotal role in managing the money supply and scrutinize the global reserve currency landscape, especially the efforts by countries like China to create alternatives to the U.S. dollar. By the end of this segment, you'll understand why comparing the U.S. to countries like Greece is a misconception and what the potential market impacts of a loss of confidence in U.S. securities could be.
Exploring solutions, we talk about increasing revenue, decreasing spending, and more controversial strategies like selling U.S. assets. Emphasizing the need for sustainable fiscal policies and improved financial literacy, we also highlight the benefits of a divided government in fostering fiscal responsibility. We recall the last budget surplus under Bill Clinton as a beacon of successful bipartisan negotiation. Join us for this compelling discussion on the urgent need for a long-term plan to manage the national debt and ensure future economic stability.
For More information on plans for solving national debt:
https://solutions2024.pgpf.org/plans/
Straight Talk for All - Nonsense for None
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Welcome everyone to Skeptic's Guide to Investing. I'm Steve Davenport and I'm here with my partner, glenn Miller, and today we have a very special guest. Steve Gattuso is a CFA who we worked with at Wilmington Trust and he's currently the Chief Investment Officer at Courier Capital for the last work there the last 14 years, and he's also a professor at Canisius in Northern New York. He's been a professor there for 13 years and for seven years prior to that he was at Niagara. So Steve brings a lot of experience in investment management. But in particular, he's concerned about the national debt Now. Steve believes in unicorns and Santa Claus and he thinks that we can do something about this in a rational way with reasonable people and arrive at a solution that we'll all be happy with.
Stephen Davenport:I'm not sure any of those things are going to happen, but I think we should listen to them and try to understand the problem and think about how we got here, and then maybe it'll help us to think about how we get out of this mess. I'll just put up one parameter. Right now, our national debt is somewhere around $33 trillion. That's a trillion with a T, and we are adding to that significantly, particularly because our interest expense has gone from about $200 billion to now almost a trillion. So we've added interest expense equal to or greater than the entire defense expenditures. So these are very daunting numbers and I think that you know, great minds think alike and so all of us believe that there are solutions. And how ready is the economy for some austerity in terms of loading spending and also some possible tax increases?
Stephen Davenport:So I'd like to say welcome, Steve, and tell us what you think we have, how we got here and how we're going to get out of it.
Steve Gattuso:Well, thank Steve, and it's a pleasure to join you. Thank you very much for having me. I think this is one of those issues that maybe gets not enough attention. Maybe it's getting a little more lately, but there's a lot of people kind of putting their heads in the sand on it, or maybe there's just a general misunderstanding of what the problem really is. I know there are people who get the terms deficit and debt mixed up, for example, and what I usually do in that case is explain to them that your deficit if I were to use an analogy in personal life you make a certain salary and when you spend more than you make, where does that difference go? And usually they get it goes on their credit card. So our deficit annually is the fact that the US government spends more money than it takes in. So there is that national credit card. And when I further explain that the debt is when you get that credit card statement at the end of the month and you open it up and you see the balance, that's what you owe. So that is the $33, or really almost closer to $35 trillion that you just mentioned, steve. 33 or really almost closer to 35 trillion that you just mentioned, steve, and you know there's always a. There's that axiom. You always hear that when you're, when you've dug yourself a hole, the first thing to do is stop digging. And given that we are adding to that debt every year by the one point seven to $2 trillion deficits we have annually, the first thing we got to do is hopefully stop digging.
Steve Gattuso:But how we got here? It seems like there's been a magnitude change in people's perception of dollars. I remember back, in a way, the great financial crisis. The Obama administration proposed a rescue plan to help us out of it. I think it was $750 billion and at the time I remember being flabbergasted oh my gosh, $750 billion. Now we've become desensitized to dollars where, unless it's got a T in front of it for trillion, we don't think it's anything to worry about. It's a drop in the proverbial bucket. So I think what did that is COVID too. The fact that once we got to COVID and we started spending trillions in saving the economy and rescuing the economy, that's probably started our desensitization to the amount of spending that we're doing so right now. It was understandable. During COVID it was a national emergency that you're going to run deficits. That's what governments do. But after that, we seem to still be in this emergency spending mode where we're spending it on other things.
Steve Gattuso:And just to give you a little bit of facts around this, if you look at the federal deficit, that's the annual shortage it grew by 7.5% of GDP from 2001 to 2023. And the reason I like to use percent of GDP it accounts for that growth. It's not just raw dollars, because we can you know, everyone can talk about raw dollars till the cows come home, but you might not really get your head wrapped around it. And the economy has grown. But where does that come from? Well, just a few things.
Steve Gattuso:The mandated services spending that you're talking about, social security went from 4.1% of GDP in 2001 to 5% now. Medicare went from 2% to 3.1% of GDP, medicaid went from 1.2% to 2.3% and then other spending went from 2.2% to 3.5%. So basically, our mandated spending went from 9.6% of GDP to 13.9. And that means that the spending grew faster than our economy grew, which is an unsustainable path. Then you add on to that net interest, which has grown, you add on to that discretionary, which has also grown a little bit, and it puts us in the situation we're in right now.
Steve Gattuso:And it's not all just spending too, because we've also had an issue with the Tax Cuts and Jobs Act. Actually, our revenue declined slightly too. Now, the only thing about the Tax Cut and Jobs Act that was enacted in 2017 is it's going to sunset in 2025. So theoretically at least, income for the federal government should bounce back a little bit. But when you look at all these, this is how we got to $35 trillion of debt, which is over 100% of our GDP, over 100% of our GDP.
Clem Miller:So, Steve, our debt, our public debt of the US, except for a sliver, is owed to ourselves. Right, the government owes debt, public debt, and us uh taxpayers and us citizens basically hold a lot of that public sector debt in the form of treasury bills, treasury notes, treasury bonds. You know, we hold that. The debt is to ourselves, except for a sliver, admittedly, that some other governments, sovereign wealth funds and the like hold. The vast majority of this is owed to ourselves. So, given that, how much should we really be concerned about the overall debt?
Steve Gattuso:Well, there are a few things. Now you say we owe it to ourselves. There's some intra-governmental debt. So, for example, the Social Security Trust Fund, which we now are dipping into, is government owing government, if you want to say it that way, and I would agree. The Federal Reserve, which has also exploded, its balance sheet is quasi-government versus government right. So those two, I see what you're saying, but given that we're the world's reserve currency and given that we are the place that is considered the safe haven, there is, beyond just our citizenship, quite a lot of debt that's held by outside the US. It's not like Japan where almost all of their government debt is just inside Japan. We have a special place in the world as the world's reserve in currency.
Steve Gattuso:So there's a dependence on treasuries and actually that's one of the technical factors I was talking about. The biggest buyers of treasuries, which are kind of out of the market now, were the Federal Reserve number one as of late, but Japan and China, and then countries like Canada too, even they own a lot of our treasuries. They're done. Japan really doesn't buy our debt much anymore. China's been reducing it. So of the three biggest purchasers of US treasuries, two of the three of them really are out of the game. In fact, the Federal Reserve is also selling treasuries, so I think that creates a technical issue.
Clem Miller:Yeah, the Federal Reserve is a different question, right? How much of our overall debt is owed to the Chinese entities, right, and Japanese entities and Saudi entities and so on, versus owed to our own people?
Steve Gattuso:Yeah, if you want to say to our own people, you're including things like insurance companies and pension funds as well as individuals, so that is ourselves. But if you have an issue with that, but if you have an issue with that in terms of where is that a problem, those are still arm's length entities. A pension fund can't give the government a break or take a haircut on the value of that debt just because it's within the country. So you've got to treat those just like you would treat, I think, any of those other externalities that we're talking about, whether it's another sovereign government or other foreign citizens or foreign companies. I think who holds the debt doesn't give you a pass at all in terms of the level of debt we have, because eventually then it gets to the confidence in your currency.
Clem Miller:Yes, so that's where I was going with this. Okay, I think you know, I think, even though, even though the vast majority of us debt would be held by, you know, institutions and retail uh based in the us right, the, if you have a confidence issue with at some point, with the us uh debt uh, or US credit rating or whatever, I think that's going to be manifest in a reduction in the market value of the US securities, which basically means an increased interest rate or yield, let's say, to be more precise. And the way for government to deal with that is essentially through the Fed, creating more, more money supply Right Ultimately, at the end of the day.
Clem Miller:So that's what it's all about, I think it's not about you know it's not about China. You know I read about this a lot, about China or Japan or whatever, pulling the plug. That's not significant in my opinion. What's significant is that there might be these broader market impacts which go to questions of interest rates and inflation, and I don't think this is the. It's not going to happen all at once. I don't think this is a tipping point issue. It's more of the boiling frog kind of issue where you're sort of sitting in the water.
Clem Miller:the water's getting hotter and hotter and hotter and you don't notice it until it's kind of too late.
Steve Gattuso:Yes, and I think the only reason we've been able to get away with this so far is because we are the world's reserve currency. You take that away and we'd be greece, um, from several years ago. So right now, with our deficit situation, our debt, we wouldn't be able to get in the european union. But I disagree with that okay about about what?
Clem Miller:because the greek debt wasn't really owed to greek citizens. No, you're right. You're right and I'm like, like our debt is owed to our own citizens. Greek, uh, greek institutions owed a lot of debt to uh, you know, to germans and to french and italians, and you know dutch and you know elsewhere in the eurozone but, as I say, once you're as once you're a single euro currency, then you could almost say it's owed to themselves, right?
Clem Miller:No, because the institute, you know they still, when they got into trouble, they still had to, uh, restructure their debts to institutions that were not Greece, right, , if and I don't know what the percentage was, but I bet you it was 80% or 90% non-Greek holders of Greek debt, and we don't have anywhere near that in the United States. So I mean anywhere near that. So we can't really compare ourselves to Greece, or I would say, Italy even, or Spain, Portugal, Ireland.
Steve Gattuso:We can't compare ourselves to any of those so-called pigs countries from the 2010 to 2013 period, and I was just kind of using that facetiously as a popular analogy, because people always saw on the news about Greek debt, because people always saw on the news about Greek debt.
Steve Gattuso:But I think you're starting to see some of the evidence of what you're talking about, where the frogs in the world are feeling the heat a little bit, because you are starting to see some diversification, not only a lack of the same level of purchasing of treasuries by those foreign entities, but you see a lot of effort going into trying to create alternatives to US as the reserve currency. I know China's leading a lot of that, for example. So I think the world at some point is going to say, well, if we can't get away with running these massive debts and deficits, why should the US be allowed to do that and get away with it? So I think you're starting to see that turn. Like you said, it's not going to be an instant, it's not going to be an immediate reaction. It's just going to be that slow turn, the way you're talking about, but eventually it does come back to the currency.
Clem Miller:Right now, there's no viable alternative, even close to the US dollar as a global currency. And furthermore, I would argue I don't want to get too technical, okay but furthermore, I would argue that the whole idea of a reserve currency is really out of date. Right, okay. Now why do I say that the idea of a reserve currency is out of date? That was a concept that goes back to the time when you had fixed exchange rates and you had central banks controlling all the foreign exchange reserves. And what do we have now? Exchange rates and you had central banks controlling all the foreign exchange reserves. What do we have now?
Clem Miller:We have global derivatives markets where there are spot exchanges, there are futures exchanges, there are options exchanges, where you can basically trade in and out of all sorts of currencies, and not just G7, g10 currencies, but it can be currencies like. You can even trade from Chinese currency into US currency, brazilian into US, brazilian into Euro, china into Euro. It doesn't matter ultimately what a company or a person has in their bank account, what it's denominated in, because they can use these instruments now. They can use these exchanges. So there's really the whole idea of a reserve currency is technologically obsolete. I would say Exactly.
Stephen Davenport:And the only thing that's I'm sure I fully agree with that. If you think about why there is such demand from institutions, particular banks or treasuries, it's the reserve issue. They need to hold a certain number of reserves. And guess what? They give 100 percent credit to US treasuries, aaa institutions like J&J, who have corporate. That's AAA rated because it's considered industrial. It's not considered national.
Stephen Davenport:So I look at it and say, well, we're creating our demand for this treasury by requiring banks to hold it. And if we're creating that demand and suddenly we stop creating it because, hey, for shareholders it might not be good If we suddenly had a question about the quality of our treasuries, would the banks and everyone still follow the same rules if they felt like the treasury wasn't moving in the right direction? I would disagree with you also on the idea that China isn't a viable alternative. China has already established its network of places where it wants to use the yuan. I think it's starting. You know it is not near a point of replacing it right now.
Stephen Davenport:I'll agree, but if you look at China's views of 10, 20, 30 years down the road, they're going to continue. They are consuming. Every bit of gold that is produced in China is put towards their debt and put towards their funding as a reserve, for the US is about backed by gold still about 7% to 9%, I believe. China is less than one. So if China wants to be a reserve currency, they need to have more gold and every year they're adding gold as quickly as they can. So when we say they're not there yet, I agree, they're not there, but they are certainly moving in that direction. They have goals that say they want to be the reserve currency. So I think that, given the number of choices we have, we need to focus on China. There is no one else besides China that I think could do this.
Clem Miller:China has capital controls and as long as they've got capital controls, it's not going to be a currency that is desirable by folks around the world.
Stephen Davenport:Yes, but Russia seems okay with it, and so does some of their other trading partners. Right, I mean, they're creating a closed universe. I agree it's not a free universe for a flow, but they are creating demand and they are creating markets and therefore, if they were to move more towards the mainstream, I think some of the capital controls could come down. And I don't want to wait and react to something. I'd rather kind of think about it ahead of time and have a plan for how we're going to act.
Steve Gattuso:And I'll split the difference a little bit. Conceptually, I understand what Clement's saying and I don't disagree. The reserve currency is a throwback to a prior era and we're moving away from that. But in practice that's where I agree with you, steve no one's really gotten off that yet it's still the US dollar and the US treasury is still used as the world's reserve currency right now, even though you're starting to see people trying to move away from it. Now, this bifurcation politically, we're in a multifaceted world. It used to be Russia and the US, but now it's Russia, us and China. It's creating some of this as well.
Steve Gattuso:But there are still things that are in place right now which the US dollar has a specific, special situation. You look at gold and you look at oil. Those are only denominated in US dollars. So if you start to lose faith in the currency, given the deficit and debt situation, then all other things being equal in price of dollars, those two commodities should start to rise and we're starting to see that at least, certainly with gold. Right, but there's also supplying demand factors that go along with it. But I think you're going to that's where you also start to see some of these issues with lack of faith in the US dollar, given the fiscal situation, is you're going to start to see those commodities rise and you're starting to see just what you talked about Steve China's starting to exert its influence and draw people away from the US dollar as many people, as much as they can. Can't do much of it right now, but over time that could change.
Stephen Davenport:I don't want to get too involved with the Fed, but let's just say the Fed. Get too involved with the Fed, but let's just say the Fed. You know, is the Fed doing a lower rate since September and December because they realize what pressure it's putting on the government to have the interest expense so high, or are they doing this to help improve the near-term economy? I would argue that they feel a lot of pressure because, ultimately, government is going to have to address these continuing resolutions and everything they keep doing. They don't seem to be able to come to a budget framework that works. Therefore, if your interest expense just went up $800 billion, I think the Fed is under extreme pressure and they won't admit it to lower the debt and to lower the rates because they feel that the way that interest is adding to our debt is becoming an unsustainable item.
Steve Gattuso:Yep, this raw dollar amount that we're talking about, it really only is a phenomenon of the last 15 years, when we were basically in a zero interest rate environment for most of that, right since 08. So we haven't had to deal with the combination of high debt levels and high interest rates, which create that carrying cost you're talking about, and even now, the average interest rate on federal debt is still climbing because of the role that's happening. So, as you mentioned, steve I mean I got some figures on this For the 2024 federal budget year, net interest is projected to be $892 billion, so, closing in that trillion, 13% of GDP. Defense spending, as you mentioned, is 954. So they're within a hair of each other, and non-defense discretionary is 900. So-, so, going along this path, if interest rates don't fall, then we're talking about interest being the second largest piece behind mandatory spending of the federal budget, which limits what you can do and is going to limit your growth. So I am concerned about that. At $35 trillion, and adding each 1% increase in carrying costs, is $350 billion.
Stephen Davenport:Yeah, it's frightening and I kind of believe that I like Clem's idea of you know, if we all owe it to ourselves, let's just all agree that we'll, we'll live with whatever it is. But that only works if you have a sustainable ability to pay that interest. And I think that, as we look forward, I can't imagine that people are going to say I want to own treasuries that I think the rate's going to go up on versus keep a rate in my example of a J&J bond, which would you want to own and which would you, as a fiduciary, be required to own? I mean, I had this discussion about ESG, Stephen. You can tell me, you know, if we look at ESG and things that are, you know, for reasons of purposes, you wanted to be invested in things that you believed were high quality and didn't have negative impact on the environment or the governance or the society. I mean, does the Treasury satisfy that? Are Treasuries an ESG investment?
Stephen Davenport:I think no see for now, but I'm not sure we will be able to say that in five years or 10 years.
Steve Gattuso:Right, and I mean that's already started too. You look at what S&P 500, or, I'm sorry, you look at what Standard Poor's did you know? Back after the great financial crisis, they reduced treasuries to below AAA and now you just had the same of another one of the underwriters express concern about it. So you know that's already starting.
Stephen Davenport:Yeah, and I don't know how you're going to be able to say to people I can't invest in this because you know it's quality or whatever. Isn't what insurance companies, I think, have a lot of debt that they own and they have to own because it needs to be a certain quality level. Those insurance companies don't buy anymore.
Steve Gattuso:This is going to rapidly change Right, there's your technical factors I was talking about. When you have so much debt that the role of that debt plus all of the debt in the marketplace it is crowded out by treasuries and you don't have enough demand from buyers, then there goes your yield, right. Your yield is going to increase. That carrying cost, no matter what's happening, fundamentally that carrying cost is going to increase.
Stephen Davenport:Right. And when you look at it overall, the impact of that debt in terms of how we view ourselves around the world, we've only seen things flowing one way, meaning investors have been putting money in. When we start to see the flow the other way, I think that we're going to see more volatility and more. And we've got nations China, russia, iran, nigeria we could go through a list of countries Venezuela who don't want to see or don't want to. I mean, we've weaponized the whole system. By the way that we captured the assets of Russia during the Ukraine situation, right, I mean, the fact that we took, you know, the system, the SWIFT system, and we use it now as a way for political leverage, has encouraged more and more people to step away from the system.
Steve Gattuso:Right, Exactly, less and less people interested in having. If I'm a bad actor, I don't want to hold my assets in US dollars right? Exactly.
Stephen Davenport:Right, and I know that gold isn't the answer. I don't think crypto is the answer. So somebody is going to show me where you know there is a better answer, and I'm not sure it's. You know Euro denominated. I'm not sure it's Japan denominated. I think , that each of these countries has glaring problems, but I think that we have to first look at our glaring problem and figure out. I think we know we're in a situation where we need something. The question I have for you is all right, we've gotten here. How do we go from here forward?
Steve Gattuso:Well, and there's only two answers to that right.
Steve Gattuso:You either increase revenue, you decrease spending, or a combination of the two, or you inflate your way up and that takes a while. And right now it is the third rail, right? Yes, exactly, because that's a tax on your citizens. Then your citizens are taking the punishment for that, because it's an invisible tax, right? So? And again, right now we're in a situation we're trying to reduce inflation, so we're not, we're not accepting higher inflation with this goal in mind right now. But the concerning thing is, we're in election season right now and you listen to both candidates and so far, economically since we just had candidate Harris's economic goals come out a few days ago both candidates have policies that they're talking about that are going to increase the situation, increase the deficit situation, but it's not increasing taxes with the goal of putting us in a better balanced annual budget situation. It's to increase taxes to fund more spending. So that's not going to help us out.
Stephen Davenport:You're talking about what about the taxes, or eliminating the taxes on tips? I think that'll help us.
Steve Gattuso:No, and they're both doing that one. That was one of the top of the both doing. But you're talking about Harris wants to increase minimum wage. She wants to. She talked about relief of not only student debt but medical debt. You're talking about twenty five thousand dollars to first time homebuyers. You're talking about an increase in the child tax credit. All of those are going to have the impact of increasing the deficit situation, whether it's a reduction in income or an increase in spending, so that's not good. When you talk about Trump, you know he talks about tariffs and he talked about the tips, the way you're saying, and his policies but also another tax cut. You know he's talking about decreasing corporate tax rate from 21 down to something else, so that's a reduction in revenue. Both of these situations, on the surface, do not look like they are going to address what is a historically bad deficit situation annually.
Stephen Davenport:Can I just bring up one concept? I mean, I've read the book, the idea of the US as a business, and the concept is what about all our assets? What about all our assets? Don't we have a lot of assets in terms of land rights for minerals, offshore rights and all of these assets that if you were a business and you were suddenly behind the eight ball, you needed to sell some? Would we ever do things? With the assets of the US government to try to address this debt issue.
Steve Gattuso:The question I have about that is scale, and I don't know, I couldn't say what we own. I know there's no study on that that I know of or anything, but are you talking about trillions upon trillions of assets that we have that could be sold for market value in order to do this? And then, politically, even if we did, would the will be there to put us in a better fiscal situation, or would that be seen as a windfall to spend on other things?
Stephen Davenport:Well, I think it would cause a lot of controversy. So I would say that it has to be something that is a big problem. So when this problem blows up which I don't know what, it will be the precipitating event. But I do believe that a deep recession or some of these things could cause us to say, hey, this is unsustainable, we need to do something. What I was thinking of is, if you think about timber and then the land, if you took some timber land that was not near, was in the national parks, but not near the assets of the national parks, could that development cost?
Stephen Davenport:and revenue you get from that be beneficial to the country. Yeah to some degree you have to think about things that are different than the way we've talked about this. Like you said, it's a two or three solution problem. Right, there's either spending or there's income, and I think that the other part of this is, if you're an asset owner and you've got a problem, you've got to look at how do I liquidate some of those assets to solve my debt problem.
Clem Miller:Hey, steve, to some degree we're already doing that, because we do have timber leases, we do have mineral leases, oil leases. We're not selling these assets, but we're leasing them, long-term leases. So there's certainly a precedent. We may not be doing enough of that, but there's certainly a precedent for doing this in the future.
Stephen Davenport:Right. I'm saying that we probably need a five or six pronged. You know, I've seen different studies and they say which is Social Security and Medicare and extending the age. Since we're all probably safe from seeing our Medicare and Social Security benefits change. For Social Security, Is it time to have a 67 age for Medicare and is it time for us to rethink the whole concept of what is retirement and what is life after work.
Steve Gattuso:It's funny you said that, because that's exactly what I tell my students in the financial planning class is that they better plan for full retirement age Social Security to be 70. The government's already done it once. I would see them doing it again and their valid claim is that people are living longer. I mean, think about it. When Social Security was started, you worked to 62, you lived three more years and you died, and up until recently we had more people paying in than collecting from the program. So everything was okay for all these years. Only now do we start to see it turn the other way, and I think those are certainly partial solutions.
Steve Gattuso:The other thing I would obviously add to that is the chain CPI issue in terms of increases in social security. So I think there are things to address it. But I think a couple of things. Number one any solution like that is just prolonging the problem. It's not a true sustainable solution. It just extends it out a little bit more. So instead of 2033 or 2034, you might take it out to 2050.
Steve Gattuso:That's one thing. I think the fact that the system was built on to do things it wasn't supposed to do and extended by many politicians in the past has made this an unsustainable model. You just don't have that, and once your demographics turn upside down it becomes even worse. So I think those situations certainly, but I think there's also the perception among the American public that Social Security was supposed to be your primary retirement vehicle, and when FDR put it in place it was never meant to be. It was always meant to be a supplement. So there are so many people living almost solely on Social Security or accounts for a majority of their retirement income that I think that would be kind of hard to do in the near term.
Stephen Davenport:What do you think, Clint? Do you see this third rail of Social Security and Medicare ever being touched by the political will of our country?
Clem Miller:where it becomes increasingly difficult to assume that people live longer, right? I don't think it's not. It hasn't. It's not an arithmetic issue. Over time, it's really one where you have a declining rate of growth and longevity and and I think that you know it's hard In other words, it's easier to get from 62 to 67 than it is to get from 67 to 72 in terms of a retirement age. So I think it's going to be very difficult to. I'm not saying it's impossible, I'm not saying it might not be like one year at a time, but you know it's going to be more difficult to be able to increase retirement age as we progress.
Stephen Davenport:What do we think about how the tax question solves this problem? I mean, is a value-added tax that has 100% allocation, is not part of the budget process but grows towards the debt? Would people be okay with a 1%?
Steve Gattuso:or 2% value-add tax. That addresses the deficit In a consumer-driven economy, you're going to cause yourself some growth issues.
Stephen Davenport:Yeah, isn't the overwhelming idea of higher rates because of excessive debt going to cause some growth issues? Yes, it is.
Steve Gattuso:So one's a potato and one's a potato Well, I'd say one is more in the face of a voting citizen than the other one is OK, well, why?
Clem Miller:don't we see the?
Stephen Davenport:tax that everyone pays and let's just focus on the people who are wealthy. Can we tax the wealthy enough to solve the debt problem?
Clem Miller:Well, eventually there won't be enough wealthy in order to get there. So that's that problem I think it comes back to, in my mind. It comes back to who holds your debt. If you're funding this with foreign money, that's a huge problem, but we're not anywhere near close to that being a problem yet. If we fund it, you know, through our own institutions, who are thinking in terms of their returns on their investment. You know the yields on their bonds, yields on their stocks, returns on their bonds and stocks, and you know if they continue to hold and price it appropriately and you know it can affect how much the government is paying out on interest to be sure, right, but I think that's, you know, that's.
Clem Miller:That's the issue we need to be concerned about. Is that we can do some things around the edge. I don't think there's going to be that much of an increase in age. I think for the retirement, I think we will be able to do more in the way of leases of land. But how much more right, we're already doing some of that already. So it's an issue. This is an issue. I wouldn't say it's necessarily intractable, but it's an issue that will be with us for decades and may progressively get worse, but not with any tipping points.
Steve Gattuso:Well, and I would agree with the one point you were saying If we stopped right now and said, okay, $35 trillion is it, and we're not going to add any more to that debt, then I think it's manageable, because you either a combination of inflate your way out of that and it becomes a smaller portion of your GDP as your economy grows. But I think the bigger problem is not only the current levels of debt, but the fact that we are on an unsustainable path of continuing to add to that debt faster than our economy grows. That's where I think we've got a really big problem. Faster than our economy grows. That's where I think we've got a really big problem and no one is talking about trying to at least fix that part of it. Let's stop digging. Both candidates I'm talking about are going to add more to the debt.
Steve Gattuso:So that's, I think, the bigger issue, and where this comes to be a problem sooner rather than later, is it is GDP drag right. You got lowered growth due to higher taxes. If you're doing the income side, you've got lower growth due to reduced spending. If we do that, and even just their capacity to spend, as my interest expense takes more and more of my annual budget that leaves less room to spend. As my interest expense takes more and more of my annual budget, that leaves less room to spend on other, maybe value added things. So you got a GDP drag, but then also you've just pretty much disarmed fiscal response to recessions as well. Now you've got that issue because it's going to be much harder for the government under fiscal policy to come to the rescue of a recession, so you could have deeper and longer recessions. We haven't had one yet to test that out.
Stephen Davenport:Yeah, I think that I mean to me this is a really communication problem, right? Because people aren't talking about it and they're just walking. You know, we're talking about AI and the benefits of AI, but we're not sure how any of this really happens going forward. And, like I was seeing with our energy policy, I don't think anybody knows how to plan more than five years in advance. I don't think anybody wants to plan more than the one year or two years of their term or, if they're a senator, six years.
Stephen Davenport:I think that everyone looks to get reelected and says what is it going to do? What is going to help me? And so far I haven't heard anything. That I think is a running plan that would say hey, I'm going to be the most popular guy in the country because I've got a plan for how to resolve, and it'm going to be the most popular guy in the country because I've got a plan for how to resolve and it's going to be higher taxes and lower spend. That's not going to extend his political career.
Stephen Davenport:So I look at this and I say it's as much a communication question as it is anything to do with the numbers. I think we have to have a serious discussion as a country about what is it like to live with deficit spending and talk about deficits in individual financial literacy and then talk about it as why the country doesn't show us how to live. Why don't we look at the budget and say this year we came in at 17 instead of 19. That 2% going towards our debt, you know, talk about what the benefits are and talk about the historic results Because, as I said, it's really been kind of a fortunate thing that we just continued on and had those. You know, the overall budget is 14% of our GDP and now that we're getting up to 19 and 20, um, it's probably time that we have a, you know, a sit down and just and discuss it. But I think that there's no will. If there's no will to get rid of Saturday delivery of the post office, there's no will to get rid of some of these things.
Clem Miller:I think the one thing we need coming out of this election is divided government. That'll help.
Steve Gattuso:Exactly that's my exact goal for the election.
Stephen Davenport:Yeah, I kind of believe that will be the result and I think it will help us, but I still believe that we're still going to have to do budgets. I still believe that we're still going to have to do budgets every year and we're still going to have a system that's mainly broken and, uh, it doesn't, doesn't really encourage behavior. That, I'd say, is you know, until they, absolutely until the government's ready to shut down, that's when we start really negotiating.
Clem Miller:I just think back to our last government budget surplus, which was under Bill Clinton, and the reason he did it, the reason he had a budget surplus, was because he was able to negotiate with Congress and he, you know, later on, when he wrote about this, he said look, you know, this is what I had to do. I knew what my, my political limitations were, and so, you know, he decided to make something of it and that's what he did.
Stephen Davenport:OK. So if we could make two changes one to the income side, one to the spending side to help resolve the debt, what changes would you make and why? I'll start If I could make two changes, I would say that we consider selling versus leasing in some of our usage of national assets, leasing in some of our usage of national assets, and in doing so, I think the lease to buy versus would probably be about 20 times that amount. So you would probably be able to more quickly resolve and the only use of those funds would be for reduction in debt, and in that way I think it's. And the other thing I would say is we are getting healthier, we are living longer, with an average lifespan for men of 77 and women of 79.
Stephen Davenport:I think the ages are way too young. I would look at saying those ages need to be moved up to from 65 for Medicare to 70 and from 67 to 75 for Social Security, and I think that we need to have a system in government that takes care of those people who are older in the unemployment system instead of in the social security system, and in that way you could have a much older age and you could have people who are semi-employed or self-employed to a certain degree but still receive a, say, $25,000 supplement or whatever. That would change the kind of the look of how our system works with social security. Clem, what do you think? What would you change?
Clem Miller:Well, you know I certainly you know I'm at the point where there are things that should be studied and not necessarily implemented until there's considerable study afterwards. So one of those would be looking around the world and deciding on a rationalization of where our military commitments should be. And I'm not talking about a Trumpian let's withdraw from NATO and all that kind of thing. But we have lots of bases overseas, everywhere. We have lots of military commitments and it could well be and they're very expensive and it could well be that we can rationalize some of that. That's happened in the past.
Clem Miller:I believe the BASE Act or something like that from the 80s was an effort to do that, and I think that is certainly something that I think we should definitely study, take a look at, uh, and and take action Uh, if, um, if there are some ideas that can present themselves there, uh, the other thing I would do is, you know, I still think, uh that there is a lot of uh manipulation of the tax system, uh money from flowing from overseas back into the United States by corporations, and I know that under the Trump administration there was some effort to try to resolve that, but I think it's still happening and I think there needs to be some way of being able to to reshore, let's say, some of that, some of that money that's out there. So you know, if we can try to reshore semiconductor chips, we can try to reshore some of the profits that are our global companies have made some of the profits that our global companies have made.
Clem Miller:Okay, so reshoring and relocation or reallocation of resources for basis Of actual capital, not infrastructure, not plant, but financial capital.
Stephen Davenport:Steve, where are we going to get the income and where's the spending going to?
Steve Gattuso:Well, given that about 80 percent of the federal government's income comes from individuals, I think that would go a long way and maybe even bring in some additional revenue situations. They exist at such a point where increasing tax rates is really just kind of window dressing. So, for example, carried interest, things like that. If you started to attack some of these, I think a more simplified and transparent tax system would at least make revenue more predictable, if nothing else. And then you know, continuation of economic growth and promoting policies that do that is going to also bring in more tax revenue. So that's the income side.
Steve Gattuso:I think on the expense side there's a lot of rationalization that needs to be done. You can do things like try to eliminate a lot of government waste and make bigger governments smaller. If you look at the jobs reports, over the last year a lot of these jobs have been added to government jobs. We're still adding jobs. So I think you can get rid of a lot of waste and that'll help a little bit. But I think the real meat on the bone is going to have to be some sort of change to mandated services that make them sustainable, and I'm not going to pretend to know what those would be, but, yeah, something like an extension of the ages. You know, that's certainly a help. Think the mandated services have to put on a model where the growth in them is sustainable, which is not right now, and that's what I would do on the spending side.
Stephen Davenport:Okay, we're getting near the time to wrap up. Do you each have, I don't know, a mandate or an idea that you think we're not currently thinking of? That should be considered? When we look at the world as a smart system and we think about how we can adjust the system, I look at it and say AI is supposedly going to be this big beneficiary. One of the biggest spenders is the US government. Should we be focused on using AI to help make the government more efficient and therefore our expenses less? Are there other areas that you think we're missing that some other country is doing a better job of in terms of rationalizing, whether it's budget controls, strict no-deficit rules or something that we could do if we had a magic wand, what would that magic wand do to solve this crisis?
Clem Miller:I'll go first. Honestly, when I look around the world, I see a lot of examples that are worse than the United States. In Europe I see a situation that's worse Japan. I just you know you don't have examples of states out there that, except maybe some very small countries that don't have deficits, and you know some of them have big debts as well. So I think, you know, I think that's there's. No, there are no examples out there that I can think of. I agree with your point about using technology and in fact there is an organization within the US government that actually provides and helps out the rest of the US government, as well as private industry, in promoting technology and science, and basically it should be called like the National Solutions Agency, but it's in reality called the National Institute of Science and Technology, and so I would fund that thing, fund it, fund it, fund it, fund it and have it provide all of the solutions we need. We're still not going to get anywhere close to where we should be, but that agency could help out.
Stephen Davenport:All right, Steve Well.
Steve Gattuso:I got one thing and I'll leave you with something that's not so good. Yeah, I do think that some sort of restraint on deficits at this point is necessary, whether it's a certain percentage of GDP or an average over three years. I think right now there's no limit and there's no consequence to continued annual deficits, and I think that's where we need to start, because that's the stop digging rule that I have. Like I said, the debt level not great, but it can be managed right now. You just got to stop adding to it faster than economic growth. Maybe a deficit no larger in percentage than last year's economic growth would be reasonable. But the other thing that's a little bit more scary is that we're only talking about debt at the federal level. We haven't even started to talk about debt at the state or local level yet, which, really, if I'm a citizen, I'm impacted by all three.
Stephen Davenport:Yeah.
Clem Miller:Yeah, I mean that's a discussion for another day.
Stephen Davenport:Exactly the federal government does an excellent job, and then they'll all follow the federal government does an excellent job, and then they'll all follow in lockstep once those new ideas are implemented at the federal level. Since we're going to talk about unicorns and Santa Claus, but thanks for coming today, steve, thank you, thanks, as always, thanks, steve, thank you, thanks, steve. I hope listeners have enjoyed the Skeptics episode today and continue to like, share and let others know about what we're trying to do to help make the economic wellness of individuals better.
Steve Gattuso:Thanks everybody, Good to see you Bye.
