2024 Theme - Year Of Election Uncertainty
You may not have realized it yet but next year is going to be a year full of elections.
Not just any elections either but important contests in major democracies and likely brutally bruising ones at that. The stakes are very high.
It isn't just the US either: South Africa, Brazil, India and many other important countries are scheduled to have major contests. All in all some 30 countries will be hosting major elections next year.
Many readers of this newsletter will likely be dreading the American political contest - for understandable reasons - but that may prove a walk in the park compared to the likes of Venezuela's Presidential election or India's general vote.
It says a lot about the state of the world that many people will lose their lives no matter what the outcomes will be. Here is hoping the US avoids that fate.
One of the interesting aspects of these political contests is that these elections may be in very different countries with varied political systems at very different states of development but they do have quite a bit in common:
A high fiscal deficit for one.
There are 6 and possibly 7 countries where the fiscal deficit is likely to be above 5 or 6% of gross domestic product next year. That is very high and will present a policy challenge and therefore will likely become a political issue in many of those same countries.
This includes the US, of course.
For America the issue isn't so much the high deficit per se (though it is high!) as the fact that the deficit is both:
high
and rising
During a time of strong economic growth......
As we have pointed out a few times, this is very unusual. It is also a precarious situation because it means our expenditures are galloping ahead of our revenues at the time when our economy is performing best.
The unpleasant implication is obviously: if growth slows, the deficit will explode higher still. You can see how thorny this could suddenly become.
Ideally, while the US economy is growing the deficit should be coming down as the economy is growing and tax receipts are flowing in that help cover the distance between revenue and spending. Thanks to a nasty combination of long term welfare commitments and higher short term spending, the US finds itself struggling to contain its deficit right as debt service costs rise.
We are borrowing more right as each dollar borrowed costs us more and more.
This problem is getting worse, not better in 2024.
The federal budget deficit totaled $383 billion in October and November 2023, the first two months of fiscal year 2024, the Congressional Budget Office estimates. That amount is $47 billion more than the deficit recorded during the same period last fiscal year: Although revenues this year were $108 billion (or 19 percent) higher, outlays rose more—by $155 billion (or 17 percent).
At a high level, over the last year the real US federal budget deficit has doubled from $933 billion to over $2 trillion. It continues to climb as we approach 2024.
What is true for world's largest and wealthiest economy is triply true for developing countries like India or South Africa or Brazil. These countries are neither as wealthy nor as trusted by the markets. They also don't control the global reserve currency like the US and must borrow in a currency that is not their own.
This state of affairs means that, in country after country, the same tough conversation will be had during 2024.
Voters will have to do more with less.
This is because politicians will be unable to do what they typically do:
Promise to lower taxes
Or provide giveaways to voters via more spending BEFORE the election itself.
Or some combination thereof.
Now that doesn't mean they won't try. The more irresponsible - possibly including President Biden! - will toss some tokens to the population. Student loan forgiveness will likely be a big feature of the US campaign, for instance. However, symbolic gestures and cheap talk won't change the brutal reality for most countries around the globe.
The reason is pretty simple:
Most societies find themselves trapped between a fiscal rock of high debt and deficits and the increasingly hard rule of the bond market.
By this we mean that any further significant increase in government spending (the fiscal part) will see an accompanying rise in bond yields (driven by the bond investors or "vigilantes") that will raise the cost of that spending.
Put differently, it is getting harder and harder to simply spend your way to economic growth.
In practical terms, investors are refusing to allow politicians to spend freely and aggravate an already bad fiscal situation without paying for it. There is no more free lunch. If you want to act fiscally irresponsible, you can but you will have to pay for it.
The UK found this out to their cost in the autumn of 2022 when the bond market revolted at the tax cuts and spending plans of the new Prime Minister, Liz Truss. She was forced from office shortly thereafter and that painful and politically embarrassing drama was no doubt watched uncomfortably in other capitals.
The reason is simple: most nations, developed and developing, are in a similar situatoin. Very few countries are sitting pretty after years of Covid-related excess and high inflation.
In practical terms this means that, in country after country, there will simply be no credible low-tax option for voters come election time.
This will be the case for the US and will constitute a pretty big change for the world's largest economy.
For the first time since 1988 where neither major party can seriously promise to lower taxes. Rather all the focus from both sides will be, also for the first time in many decades, on giving voters less.
Rather than grapple with how to divide the proceeds of growth between tax cuts and spending promises we will instead be be debating what we can do without. Unfortunately, that will make an already high stakes and nasty election even more contentious.
It should be a bipartisan priority as well! Annual interest payments are already at their highest level as a percentage of gross domestic product since the 1990s. As the 2020s progress, these payments will rapidly start to outpace what we pay on core entitlement programs as well as the military.
Therefore there is something for everyone in bringing down the deficit, in other words.
It is perfectly possible to reform our economy and state to be able to either spend less or grow faster or both but it will also require tough tradeoffs and sacrifices.
Grim!
But the US will not be alone. After all, the US has the exorbitant privilege of being the global reserve currency which allows us more leeway than most to borrow and spend. We are coming to the end of that however. There are simply limits that investors - of any nationality - will tolerate.
So, saddle up. Stock markets and the economy are both doing very well and that could continue into 2024 but not everything is rosy.
Some of these gains have been purchased by excess government spending and issuing debt. That pulls forward growth from the future and we are going to start coming to terms with the fact that the future is now!
The year of elections will also be the year of tough choices. Think carefully and choose wisely!
*******
Have questions? Care to find out more? Feel free to Download our App (!!) or reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
