🔍Deep Dive: US Federal Budget Deficit Through 2024

Welcome to yet another edition of the “Deep Dive”. This week is a macro-focused edition where we analyze the U.S. federal budget.

The United States is on an unsustainable fiscal path, one that could potentially lead to the country’s bankruptcy and eventual rampant inflation. This isn't just a minor concern—it's a significant risk that has the potential to impact not just the U.S. economy, but global markets as well.

Our goal is to understand why this current path is so dangerous and the subsequent implications for the broader global financial landscape, and Bitcoin’s role as a potential hedge against these looming threats.

By explore the various components that make up the the fiscal budget we’re able to help investors more accurately quantify this macro risk and decide how much Bitcoin they should have in their portfolio).

Let’s jump in!

Table of Contents

1. Federal Budget Components

2. The Impact of GDP

3. Cause and Effect - An Increasing Deficit

4. US Deficit vs. GDP

5. Rising National Debt

6. Key Takeaways

⌛️ Estimated Read Time: 0.5 Blocks (~5 Mins)

Federal Budget Components

As with all first principles thinking, we begin by breaking down the federal budget into its various constituent parts.

At a high level, the federal budget is a balance sheet of the nation's finances, consisting of two main components:

1. Outlays (expenses); and

2. Revenues (income).

In 2023, the U.S. government earned $4.4 trillion in revenue. This revenue comes from various sources, including individual income taxes, payroll taxes, and corporate income taxes—essentially, it’s the money generated from the hard work of Americans, channeled into the government’s coffers.

However, the expenses, or outlays, were significantly higher, totaling $6.1 trillion. These outlays are categorized into mandatory spending, discretionary spending, and net interest.

• Mandatory Spending: This includes expenditures that are required by law, such as Social Security, major health programs like Medicare, and other obligatory expenses.

• Discretionary Spending: This includes defense spending and non-defense spending, which covers a wide array of government services such as transportation, education, and health.

• Net Interest: This represents the interest payments the government must make on its existing debt.

When plotted on a chart as the overall percentage of the country’s GDP (graph below) it becomes evident that the negative gap between expenses and income continues to grow and shows no signs of abating.

These projected revenues and outlays over time are estimated by the Congressional Budget Office, with the blue line (expenses) rising to ~24% of GPD as the green line (revenues) projected to remain relatively flat at ~18% of total GDP.

This widening gap increases the deficit, exacerbating the financial strain on the U.S. economy and making it more difficult to repay its debt obligations.

The Impact of GDP

To cover this mismatch between income and expenses, the government typically relies on economic growth (aka “GDP”), which generates more tax revenue for the country.

However, Gross Domestic Product (GDP) is expected to grow slower in the upcoming years. Recently, GDP growth was 3.1%, but it is projected to drop sharply to 1.5% this year—an alarmingly low rate for economic growth. While there’s a slight rebound expected next year to 2%, growth is then projected to gradually decline to 1.7% by 2034.

This sluggish growth suggests that the economic mismanagement following the COVID-19 pandemic has left the economy in a weaker state. Before the pandemic, the average GDP growth rate was 2.9%, but over the next decade, it’s expected to average just 1.9%. This means we’re likely to face higher costs in the future, accompanied by slower economic growth —a dangerous combination.

In 2024, the federal government’s costs are projected to reach $6.8 trillion, and by 2034, this figure is expected to balloon to $11 trillion, reflecting an annual growth rate of 4.5%. This means that government spending will rise from 23% to 24.1% of GDP, meaning nearly a quarter of the nation’s economic output will be consumed by government spending.

Cause and Effect - An Increasing Deficit

The result of this imbalance is a steadily growing budget deficit. Historical patterns show that after every crisis, the budget deficit spikes significantly.

For example, after the turn of the century, the U.S. moved from a surplus to a deficit, and this deficit worsened following the 2008 financial crisis. Efforts to reduce it were undone by the COVID-19 pandemic, which caused another sharp increase, pushing the deficit to unprecedented levels.

Before the pandemic, the deficit was just below $1 trillion, but it skyrocketed to $3 trillion during the pandemic. Currently, the deficit stands at $1.6 trillion, and the trend suggests it will continue to rise.

US Deficit vs. GDP

Another important metric is the deficit as a percentage of GDP. In the coming year, the deficit is expected to hit $2 trillion, with some minor improvement before rising again.

By 2030, the deficit is projected to reach $2.8 trillion, representing 7% of GDP. This is nearly double the 50-year average of 3.5% of GDP.

It’s crucial to understand that the deficit is cumulative—even if we maintain a 7% deficit as a percentage of GDP, it will continue to accumulate, leading to a rapidly increasing national debt.

Rising National Debt

As the deficit grows, so does the national debt. Projections show that the debt held by the public as a percentage of GDP will soon reach an all-time high, a level not seen since World War II.

The current national debt held by the public stands at $26 trillion, which is roughly 99% of GDP. By 2050, this amount is expected to double to $51 trillion, or 122% of GDP.

This trajectory is clearly unsustainable. As the debt increases, so will the interest payments, leading to even larger deficits. This creates a vicious cycle of rising debt and deficits that could threaten the stability of the U.S. economy.

Key Takeaways

This unsustainable fiscal path is not just a theoretical concern—it’s a very real and immediate threat to economic stability.

The rising debt and deficits are likely to lead to currency devaluation, rampant inflation, and potentially even push the government towards bankruptcy.

This should illustrate the critical role of Bitcoin as a hedge against these risks. As traditional financial systems face increasing strain, Bitcoin offers an alternative store of value that is not subject to the same inflationary pressures.

Bitcoin is not just a risk asset. It also functions as a hedge against the currency risk, which is rising year after year.