According to the US Treasury, on Thursday, August 25, total US public debt hit an all time high of $19.5 trillion.
This means that US debt under president Obama has nearly doubled from $10.6 trillion to $19.5 trillion: there is a good chance that on the last day of Obama's presidency, total debt will be in the $20 trillion range.
Yet even as US debt has continued to grow, one topic which several years ago was a key political talking point - facilitating the emergence of the tea party, and even resulting in the US downgrade of 2011 - , America's surging budget deficits, have gotten far less prominence in recent years, for one reason: the US deficit, while massive, was declining.
However, that is no longer the case, and as the CBO revealed earlier this week, as part of Obama's parting gift to the US, not only will his successor inherit a $20 trilion mountain of debt, but also rising deficits.
When the Congressional Budget Office released its federal budget update this week, it raised this year’s and next year’s deficit forecast due to lower tax receipts and shifts in the timing of certain payments.This was the first increase in the US deficit as a percentage of GDP since 2009.
The 2016 deficit is now projected to be $590 billion, up from $544 billion in the prior forecast. The new 2016 forecast is about $152 billion higher than 2015’s deficit. The 2017 deficit is expected to be $594 billion, not too different from this year’s.
By 2026, the US budget deficit will grow to -4.6% of GDP.
Over the long term, CBO has downgraded its growth outlook, and expects interest rates to remain lower for longer. The lower tax revenues due to slower growth are offset by lower expected spending and interest expenses.
In other words, the biggest gating factor to the Fed's rate hike cycle may have little to do with such concepts such as "r-star", an inverting yield curve, or tighter financial conditions, and everything to do with US public debt which is about to take another step move higher just as foreign central banks are dumping record amounts of US government debt...
... and ultimately forcing the Fed to go back to square one and monetize the US deficit, which incidentally was the unspoken conclusion of this weekend's Jackson Hole symposium. Recall:
In a lunch address by Princeton University economist Christopher Sims, "policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future. Fiscal expansion can replace ineffective monetary policy at the zero lower bound," Sims said. "It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts."
At least when it comes to setting the stage for this upcoming "shock", Obama has done truly an admirable job.