by Bryan Perry

August 25, 2020

At the close of the first quarter of 2020, the total public debt as a percentage of GDP stood at 107.7%. To put this number into perspective, the U.S.’s highest debt-to-GDP ratio was 106% at the end of World War II, in 1946. So, the current government has blown through that ceiling and is trending higher. The current national debt is over $26.6 billion. That’s $80,556 for every person in America. (Source: ppgf.org)

Total Federal Debt Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If you were wondering who in the world would be buying up our debt every week, especially with yields below 1.0%, according to Wikipedia, these countries are the 10 largest holders of U.S. Treasuries:

Ten Largest Holders of United States Treasuries Table

The only way the debt-to-GDP ratio has come down in history is from economic prosperity coupled with slower increases in federal spending. So, once an effective vaccine for COVID-19 is distributed, assuming society gets back to normal as we unmask ourselves, there will be a giant hole that has to be aggressively filled or the nation will likely fall into a severe recession sometime in the next few years.

Looking at post-World War II as a template, the New Deal wasn’t just big government spending at work. At the center of the New Deal was the Reconstruction Finance Corporation (RFC), an independent agency that set up lending systems to channel private capital into publicly desirable investments. It innovated new systems of insurance to guarantee loans and deliver profits to failing businesses during the Depression. Unionists, farmers, and consumers benefited, all without government needing to spend taxpayer money.

President Franklin D. Roosevelt knew he had to get capitalism moving again. But the man who actually figured out how to do that was Jesse Jones, inherited from the Hoover administration. In his 1988 book, “Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940,” author James Olson contends that the little-studied RFC was the major New Deal agency, even though it was a product of the Hoover years. Jones writes, “Pouring more than ten billion dollars into private businesses during the 1930s in a strenuous effort to ‘save capitalism,’ the RFC was the largest, most powerful, and most influential of all New Deal agencies, proving that the main thrust of the New Deal was state capitalism, the use of the federal government to shore up private property and the status quo.”

Under Jones, the RFC did not ask Congress for money. Instead, it borrowed billions from capital markets or banks. With Jones at the helm, it made money. Imagine that! The RFC developed different projects that turned cutting-edge technology into self-sustaining commercial enterprises. One example is the Tennessee Valley Authority (created in 1933), which remains a federal agency today. It has been self-financed since 1999 by use of municipal bonds paid for by the sale of power, and it receives no taxpayer funding.

In 2019, the federal government spent $29 billion on infrastructure and transferred an additional $67 billion in infrastructure spending to states. This is chump change considering the scale of the need for roads, bridges, dams, waterways, water treatment systems, schools, high-speed trains, mass transit, and cleanup projects – all of which are grossly overdue. Most infrastructure spending comes directly from state and local governments, which spent $162 billion on projects in 2017, excluding federal transfers.

Public Infrastructure Funds Needed Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The pandemic has left most states strapped for cash and taking on more debt to maintain social programs. This is already pushing budgets to new all-time debt levels. It would seem that the tale of two markets we have today – a raging credit and equity market and a Main Street market of high unemployment a tidal wave of small business failures could be addressed with sound long-term planning – like 10 year funding.

The Congressional Budget Office is a proponent of the public-private partnership model, like TVA, with the aim of having projects built more quickly at a lower cost for taxpayers. The problem is that most politicians are only worried about the next two to four years. Maybe we need more longer-term thinking.

It’s my view that some version of what worked in the past can be combined with modern thinking to not only achieve great long-term projects that employ millions, but do so in a manner that drives GDP growth  back above 3%, funded and paid for by private capital markets and user fees for revenues. It would theoretically give Congress and the Fed a genuine shot at reversing the trajectory of the national debt.

Taking a page out of the RFC playbook, it would seem entirely possible that in today’s $125 trillion global economy, private enterprise could raise whatever amount necessary to finance much-needed infrastructure, starting at $1 trillion. Even the Green New Deal could be financed through private capital markets where accountability would be intense, thereby reducing risks of another Solyndra-type scandal.

Basic Level of Economic Security Image

President Roosevelt expressed his vision for a country where each citizen was guaranteed a basic level of economic security, most eloquently stated in his Economic Bill of Rights speech on January 11, 1944, saying that individual freedom cannot exist without economic security and independence: “Necessitous men are not free men. People who are hungry and out of a job are the stuff of which dictatorships are made.” We need big thinkers who can bring private capital to meet public needs, and we need them now.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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