Submitted by Taps Coogan on the 15th of January 2019 to The Sounding Line.

Jeffrey Gundlach, founder of DoubleLine Capital, recently spoke with Barron’s to warn about the sustainability of the US national debt.

 

Jeffrey Gundlach:

“Fiscal year for the federal government ends September 30th. So, Fiscal ’18 ended September 30th and the official reported deficit, at the federal level, was $800 billion. However, the government reports another number, which is the size of the national debt. The national debt increased by $1.3 trillion dollars, more than 50% more than the official reported deficit. The difference can be things like natural disaster relief, certain military spending, things that are considered one-off and non-recurring, even though they reoccur every year. There’s floods every year. We seem to be in perpetual military operations and also there’s the lending from the social security system, which… is just a circular lending scheme, so that’s real debt too.

The debt has been going up a lot more than people think… GDP is around $21 trillion. So, $1.3 trillion is about 6% of GDP. Imagine that. In Europe, they have a big kerfuffle because Italy posted a budget deficit of 2.4% of GDP. Here we are running 6%. One way to think about it is the delta in the national debt was about $400 billion more in fiscal ’18 than fiscal ’17. That’s about 2% of GDP. So GDP would have been substantially lower if we hadn’t had this fiscal stimulus. So one of the reasons that the economy picked up was the tax package and the increase in government spending. Now those are one-off things unless you keep doing it. So if you keep having a delta of incremental spending and deficit, you are going to end of with trillions and trillions and trillions of dollars of debt precisely when the Fed… has raised interest rates… I’ve been calling it a suicide mission. They’re issuing increasingly more debt and the cost of that debt is being voluntarily raised…

The unfunded liabilities of the United States are $122 trillion, which is six times GDP. So when we think about it, if we actually try to fund these liabilities incrementally over time, it would take us about 60 years to do it by taking 10% of our economy and putting into funding these programs (every year). So we have a big fiscal mess and… it’s been observable for decades but that compounding curve is really starting to catch up with us.”

As we discussed here, and as Mr. Gundlach briefly discusses in the interview, even the CBO is now expecting the interest on the national debt to exceed 3% by 2025, at which point it will start to overtake the entire military budget.

There is more to the interview, so enjoy it above.

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