Financial Insights

The US Always Pays Its Debts

Fans of the HBO mega hit Game of Thrones are likely familiar with the line, “A Lannister Always Pays His Debts.” The US government has a similar reputation. Loans made to the government are considered virtually guaranteed of repayment. Yet just as in the show, even those with the strongest reputation of creditworthiness can be irreparably damaged by risky behavior.

Economics 101 suggests that when an economy is doing well, government should use the opportunity to pay down its debt. As an economy weakens or grinds into recession government should increase spending to support the weakening economy. Today the economy is strong. Indeed, it’s a perfect time for the government to reduce deficit spending. Unfortunately, the opposite has been happening.


The CBO is now forecasting a budget deficit of $693 billion for FY 2017, a level that is almost 20% higher than in 2016 and over 50% higher than in 2014. This is remarkable given the economy’s strength over the past 2 years.

At the same time the President and Congress (including both Democrats and Republicans) are interested in a large increase in infrastructure spending. The President has also proposed cutting taxes for corporations and the public. While tax relief of any kind is far from certain given that it does not have bipartisan support, an infrastructure bill at some point is more likely to pass since it has a base of support from both sides of the aisle. Either of these policies is likely to pressure the deficit further. All of this excludes the ongoing pressure on the deficit that will come from entitlement spending which will continue its ascent in the coming years.


Prior to the Great Recession, the largest budget deficit the US government had experienced was a little over $400 billion in 2004, so the 2017 estimate already dwarfs the 2004 deficit. The 2017 fiscal year deficit is about 4% of GDP, which is near the higher levels of the past 70 years. If the Treasury’s actions and some form of tax relief and/or infrastructure spending are considered, deficit to GDP ratios could easily reach levels experienced only during the Great Recession.

Indeed, Janet Yellen has also recently made some strong comments regarding the US deficit.

In response to a recent question about the financial risks posed by the national debt from Congressman Steve Pearce (Republican from New Mexico), Yellen said:

“Let me state in the strongest possible terms: I agree that what you’re showing here represents a trend that, given current spending and taxation decisions, is going to lead to an unsustainable debt situation, with rising interest rates and declining investment in the United States that will further harm productivity growth and living standards. I believe a key thing that Congress should be taking into account when designing fiscal policy is the need to achieve sustainability of this debt path over time.”

Janet Yellen is often very calculating about the phrasing of what she says when she speaks. It’s far more common to find her comments to be rather muted. Yet the strength of this statement underscores her justifiable concern.

It is particularly concerning that at a time of solid economic growth, the US government is unable to improve its balance sheet. This leaves the government less prepared to use fiscal policy to address the next economic downturn. Tyrion Lannister notwithstanding, the Lannister’s are not likely to have a positive ending and their flirting with financial ruin is, no doubt, a contributing factor (fighting fire breathing dragons with arrows is also inadvisable). Nonetheless, the US government would be prudent to learn the Lannister lesson to maintain its unsullied reputation as a borrower and continue to pay its debts.


The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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