“Rising yields on the back of the U.S. credit downgrade is indicative of what will occur if Washington does not curb its appetite for unsustainable spending and low taxes.” Those are the words of RSM’s Joe Brusuelas. That he’s chief economist for RSM is excess, and can be seen in his analysis of the national debt.
Explicit in Brusuelas’s comment is that Treasury debt is an effect of too little tax revenue and too much government spending. The analysis runs counter to how things operate in actual markets.
Contemplate who can borrow. The answer is very simple: those capable of borrowing have demonstrated an ability to pay back funds borrowed.
Some will respond that what’s written so far is too basic for words, and the response here is that they’re right. Just the same, it’s evident from Brusuelas’s comment to the Washington Post’s Andrew Ackerman that he’s thinking like an economist or a pundit, but not a market watcher.
Implied in his analysis is that Treasury has run up lots of debt firstly because the American people are undertaxed. Except that if the American people were undertaxed, there wouldn’t be very much Treasury debt. Get it? The ability to borrow is yet again a function of a demonstrated ability to pay what’s borrowed back. In other words, debt is an effect of market trust in the borrower’s incomings.
Markets plainly see the level of U.S. taxation as quite sustainable. If not, lenders wouldn’t loan money to the United States. The power of compounding is immense such that lending to those who can’t pay monies borrowed back is incredibly costly.
Considering total national debt, it keeps going up. Which is a market signal that lenders with actual skin in the game think that abundant as tax revenues are in the present, they’re set to soar in the future. Evidence supporting this claim is once again all the debt. Seriously, who lends in such enormous amounts on the expectation of being ripped off?
What about the spending? Brusuelas contends that the debt results from spending that exceeds the tax revenue coming in. That’s an oversimplification.
To understand why, contemplate the debt of Russia, Peru, or even Haiti. Russia has $300 billion in total debt, Peru has $95 billion, and Haiti has something like $7 billion? Are the political types in all three notably thrifty with the money of the citizenry, or classical in orientation? Really, why do they have so little debt when the U.S. has so much?
To believe Brusuelas it’s because Americans are undertaxed. Actually, it’s that those with actual skin in the game think the U.S. is a much better loan (and it’s not even close) than Russia, Peru, or Haiti. Translated, Americans are wildly overtaxed, and we have market prices to prove this: Even with $36 trillion in debt, Treasury can borrow at rates much lower than countries that owe exponentially less. The latter sounds like a signal of excessive taxation of Americans that lenders are only too happy to lend towards, not too little as Brusuelas contends.
Brusuelas’s analysis implies that markets are more than a bit dumb, twice. It’s economic analysis that markets reject.
