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As US public finances crumble, the private sector is thriving
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Figures on Wednesday showed that company profits as a share of gross domestic product (GDP) rose to a record high 13.2% in the three months to June, a quarter that has seen nominal earnings surge more than 50% on aggregate thus far.
Unsurprisingly, Wall Street is also near record peaks.
This, in turn, is creating a positive wealth effect for households, helping to offset the fall in wages to a record low share of national income.
The headlines, of course, continue to focus on Washington’s mounting problems.
The US government is running one of the largest deficits on record outside of recessions, world wars, financial crises and pandemics.
As a result, the total US debt pile recently topped US$40 trillion.
The rising term premium on benchmark 10-year Treasuries suggests investors are growing increasingly nervous about policymakers’ ability – or willingness – to rein any of this in.
Treasury Secretary Scott Bessent last week took the decision to ramp up bond buybacks in an attempt to lower long-term borrowing costs.
This surprising – some might say desperate – move has drawn significant criticism, including from Bessent’s former colleague Stanley Druckenmiller, over the threat to Treasury’s credibility.
This should put shivers into consumers and businesses too, right? Not really.
Debt divergence
While federal debt as a share of GDP is well over 100%, household debt only represents around 66%, the lowest since 1998.
This reflects the fact that a large swathe of household debt is held in low-rate mortgages, while household assets – particularly stock portfolios – have risen in value significantly in recent years.
This helps explain why consumer spending has been so resilient despite rising interest rates and energy prices.
True, corporate debt has edged back up to 71% of GDP, but it is still close to its lowest level in nearly two decades.
There has been much handwringing about the historic wave of AI-related debt financing, but the companies in question look to be in a strong position to withstand high borrowing costs.
These yields are a big concern for Uncle Sam – federal interest payments are above 3% of GDP and climbing – but companies’ net interest payments are only around 0.5% of GDP.
Many businesses locked in low funding rates in the immediate aftermath of the pandemic and are benefiting from higher interest earned on their cash balances since the Federal Reserve’s 2022 to 2023 tightening cycle.
So, public sector finances are in bad shape, while the private sector’s are looking pretty good.
Is this a problem?
High bar
Simple macro accounting suggests this is probably as it should be – a huge government deficit must be matched by a combined surplus from the private and foreign sectors.
It’s worth noting that government deficits are essentially a political choice, a conscious decision to shift resources from the public to the private sector.
President Donald Trump’s “One Big Beautiful Bill” last year certainly reflects that, with the non-partisan Congressional Budget Office estimating that it will add US$4.7 trillion to deficits through 2035.
Of course, there is nothing inherently wrong with government deficits. In fact, many developed economies may need to run small deficits to keep growth chugging along.
In the last half century, the US government has posted a budget surplus in only four years: 1998 to 2001.
It’s an obvious point, but it still bears repeating: government finances are not like household or company budgets.
Washington has near-limitless borrowing capacity, can print as many dollars as it wants, and controls the world’s reserve currency.
Dollar debasement is a potential risk over the long term, but the doomsayers predicting the collapse of the currency and hyperinflation for 50 years have yet to be proved right.
Debt loads are getting heavier and bond yields are rising.
At some point, this should ultimately hit consumers and businesses, slowing both spending and earnings.
But this isn’t happening – at least not yet.
The bar seems to be high, suggesting the public-private divide might keep getting wider. — Reuters
Jamie McGeever is a columnist for Reuters. The views expressed here are the writer’s own.
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