Blackstone’s Byron Wien has written a comprehensive blow-by-blow account of how the economy ended up in the gutter.And as many have done, he fingers a single culprit: debt.
In his new Market Commentary, he discusses what would get Washington moving on the debt problem:
I am often asked what would be the “wake up call” that would get Congress to act on the budget deficit problem. My answer is rising interest rates on government debt. When America only has to pay 2% to borrow for 10 years, legislators have a sense of complacency. If the cost of borrowing exceeded nominal GDP growth (2%–3% real plus 2%–3% inflation), they might have a greater feeling of urgency.
In his commentary, he first recalls the 1990s when it cost just three dollars of debt to spur a one-dollar increase in GDP, mostly thanks to technology, which offset wage competition from the developing world.
But everything went to pot after 2000. It now takes five dollars to produce that dollar GDP increase. Two wars, a housing bubble and the credit meltdown have put us in a $15 trillion debt hole.
And the cost of servicing that debt is set to skyrocket.
“Right now, at an average interest cost of 2.3%, it only takes about 8% of federal revenues to service the debt,” he writes, “but if the deficit keeps building at more than $1 trillion a year and the average interest rate on government obligations rises to 3%, by 2020 the cost of debt service could rise to more than 20% of revenues.
“That would crowd out spending on defence, social security and healthcare. Congress must take action to avoid the social problems that would be created at that time.”
So what is to be done?
Like most experts, Wien points to government expenditures.
However, Wien warns against a drastic cuts in government spending, which represents 25% of GDP.
“A cut in spending of as much as $500 billion in a single year would reduce the growth of the deficit, but would put GDP in negative territory,” he writes.