Logo for: Rotary Old Saybrook

OS Rotary Meeting 05/19/21

Pledge/Prayer: President Gary McCauley

Speaker: Ray Lombra, is a graduate of Providence College and received his PhD from Penn State in 1971. He has written numerous published articles and written 7 books about international and monitary economics. His presentation today is titled, "Should we worry about the exposion in the US Federal Budget Deficit?"
Ray started out by defining some terms.

Taken from Ray's slides:

FEDERAL BUDGET DEFICIT = EXPENDITURES MINUS RECEIPTS
FEDERAL DEBT = SUM OF ALL PREVIOUS DEFICITS MINUS PREVIOUS SURPLUSES
EACH YEAR THE US TREASURY MUST FINANCE THE CURRENT DEFICIT, BY ISSUING NEW SECURITIES, AND REFINANCE THAT PART OF THE EXISTING DEBT WHICH MATURES

FEW FACTS:
- DEFICIT AND DEBT WERE ALREADY "LARGE" BEFORE PANDEMIC HIT
- PANDEMIC LED TO AUTOMATIC INCREASES IN THE DEFICIT AND TO NEW DISCRETIONARY ACTIONS TO CUSHION THE ACCOMPANYING ECONOMIC DOWNTURN
- AS A RESULT, THE DEFICIT AND THUS THE FEDERAL DEBT HAVE SOARED - AND MORE IS PROBABLY ON THE WAY

NEW DISCRETIONARY COVID-19 RELATED LEGISLATION: $5+ TRILLION PASSED IN TOTAL!!!
- March 2020: CARES ACT (Coronavirus Aid, Relief, and Economic Security Act); $2.3 trillion
- December 2021: OMNIBUS CONSOLIDATED APPROPRIATIONS ACT, including $900+ billion
of extensions of Covid relief
- March 2021: AMERICAN RESCUE PLAN ACT OF 2021: $1.9 trillion

The federal debt is now $28 trillion - large and worrisome or not? Ray posted graphs and charts that showed the deficit relative to GDP to put it into perspective. Since WWII, we have not run deficits relative to GDP like we are now. The federal debt as a percentage of GDP held by the public is projected to exceed that of post WWII going forward today. Federal Reserve holdings (US Treasuries+Mortgage-backed securities) are at an all time high - over $7 trillion. Foreign holdings have also ballooned. Japan is the largest holder of US debt with China not far behind. Foreign debt is more burdensome than whats owed to us. The stock market value is about twice what it was when Trump took office in 2016 - this is a fundamental disconnect with reality. Only 10-15% of spending is discretionary, the rest are things like military spending and medicare - not much can be cut. A long term plan for bringing the debt under control will take years over several administrations - a daunting task. Adjustments that are fair can be done such as basing social security on on one's entire income instead of just part of it but this is politically sensitive. Tax increases will happen. Large corporations have whole departments dedicated to paying as little tax as possible and they are good at it so there won't be much help there.

FINAL THOUGHTS / TENTATIVE TAKEAWAYS- Upward pressure on interest rates and inflation
- Bipartisan criticism of the Federal Reserve
- Financial market risks increasing
- Concerns about "fiscal responsibility", and the difficulties associated with cutting various components of mandatory spending and raising taxes, will be major stubling blocks for the Biden agenda detailed in his address to the congreass two weeks ago.

Following his presentation, Ray took questions.