Brilliant or Bit of a Mess?

U.S. deficits are on an unstainable path unless GDP grows at a substantially faster pace. The Big Beautiful Bill is stimulative, which I believe will clearly allow the U.S. to avoid recession during the tenure of the current administration. Yet, the question remains, will the BBB be stimulative enough to allow GDP to grow by 4.5% – the required rate to offset the increase in expenditures and lower tax rates. According to the CBO, annual deficits will soar to 7.9% by 2034, requiring massive UST issuance to fund this gap. Moody’s has a harsher assessment as the rating agency forecasts a 9% annual federal deficit by 2034. Yikes!

Note: It is important to note how sensitive growth projections are. Slightly higher growth (+1%) beyond base case assumption can cut the deficit by 50%. Treasury Secretary Scott Bessent has focused on delivering 3% deficits by year-end 2028 with 3% real GDP growth. 

The US economy has grown to an impressive $30+ trillion. But 7% deficits on our massive economy requires $2.1T extra annual debt to close the gap. Larger deficits require greater interest expense: debt service now exceeds $1T annually. If the deficit grows over the next 10 years (base case), interest expense will double to nearly $2T according to the CBO as shown in the second chart below. The Fed is under tremendous pressure to cut rates as huge interest expense compounds the problem. 

So, what’s the right solution:

– Cut spending and increase taxes to better balance the budget (repressive, likely causes recession)?

– Grow our way out, requires stimulus (what is being done currently)?

– Inflate our way out to monetize the debt?

– Lower rates below inflation (ZIRP-like), while the Fed purchase the debt on its balance sheet (QE)? What do you recommend? What is your 2028 projection for growth, inflation, deficits, rates? Capital Allocation decisions will be critical.