All Eyes Are on the Debate. Everyone Is Ignoring the Most Important Issue.

Don’t be surprised if the most consequential issue facing the next president and Congress gets short shrift: the massive and growing federal deficit. Just this past week, the Congressional Budget Office sharply increased its projection of the current year’s red ink, to $2 trillion from $1.6 trillion previously, news that got scant mention in most of the media.

Yet Valliere says that in his meetings with clients, especially regular investors like Barron’s readers, the biggest complaint about Washington is that the budget deficit is out of control and has fueled inflation. “Most economists see only a modest correlation between deficits and inflation, but the voters and our clients aren’t buying it—and neither are the rating agencies,” he wrote in another note.

The economists are correct, in a technical sense. The Federal Reserve printed the money that indirectly helped fund the deficit. Since the beginning of the pandemic in February 2020, the M2 money supply has increased by over a third, while the consumer price index is up over 20%.

To the American public, however, it’s a distinction without difference. They see Washington as the culprit for the higher prices, which they deem one of the top problems this election year. And if the deficit does come up in this coming week’s debate, there’s likely to be finger-pointing—which won’t stand the most basic fact-checking since both participants have been record budget busters.

The Trump administration increased the federal debt by $7.8 trillion and the publicly held debt by $7.2 trillion, according to the nonpartisan Committee for a Responsible Federal Budget. But over 10 years, the effect of Trump-era tax and spending is estimated to add $8.4 trillion to the debt, assuming the 2017 tax cuts expire as scheduled next year.

During fiscal years 2021 (which included the final months of the Trump administration), 2022, and 2023, the red ink totaled $5.86 trillion. And with the latest increase in the CBO’s estimate of the deficit in the current year ending on Sept. 30, the total of those mostly Biden four fiscal years comes to about $7.86 trillion.

It’s a virtual tie by that tally.

But the deterioration reflected in the CBO’s new revision means the federal deficit is running at 6.7% of gross domestic product, according to a research note by Paul Ashworth, chief North American economist at Capital Economics. “It also means that, after shrinking to $1.4 trillion, or 5.4% of GDP, in 2022, the deficit has widened again even as the real economy has run hot and the unemployment rates have remained unusually low,” he adds.

Strong economies typically fill the government’s coffers. But the problem has been that Uncle Sam no longer can borrow for chump change now that interest rates have normalized. Ashworth says the so-called primary deficit—which excludes interest expenses—has held steady at 3.6% of GDP in the past two years, not much higher than the 2.9% of GDP in 2019. But normalized interest rates result in the deficit remaining at 6.9% of GDP by 2034, even as the primary deficit eases to 2.7%, according to the CBO.

One can only imagine what Ross Perot would have made of this. Back in 1992, the Texas businessman made a strong run as a third-party candidate for president by railing against what he deemed was the shockingly high total federal debt of $4.1 trillion—little more than the red ink accumulated just in the past two fiscal years.

In the predigital era, he bought prime-time television airtime to outline the deficit problem with simple graphics and a plan to balance the budget by the end of the decade. At one point, he actually led both Republican President George H.W. Bush and his Democratic challenger, Gov. Bill Clinton of Arkansas, in a Gallup poll. While Perot didn’t get a single electoral vote that November, the deficit later became a priority.

That also was the era of the bond vigilantes, who in 1992 demanded a so-called term premium to buy longer-term Treasury paper, totaling about three percentage points, Ashworth observes. Now, global demand for safe assets is holding down Treasury yields, he adds. And that has helped make the deficit a nonissue in this election year.

As the U.K. and France have demonstrated, markets can experience a loss of confidence that sends yields spiking, he writes. Ahead of the U.S. election, gold can hedge against concerns about high budget deficits, inflation, and geopolitics, UBS advises clients. But where’s a new Ross Perot now that we need a voice for fiscal sanity?

Write to Randall W. Forsyth at [email protected]