The growing disparity between federal spending and revenues raises more concerns as time passes without an easy exit strategy. The economic adjustment costs, attributed to eventual reduced spending growth and higher taxes to finance the deficit, all suggest an economy with higher interest rates and lower economic and job growth ahead.

The Long Run Has Become Short

• Rapid increases in federal non-defense outlays have now surpassed rates seen in the early 1990s. So far this fiscal year, outlays for health and income security are growing at a double digit pace year over year.

• To illustrate how untenable this is, we can note that outlays far outpace nominal GDP growth (a proxy for the tax base).

Receipts and Deficits: Going Where No Man Has Gone Before

• Federal receipt growth has now fallen over 14 percent year over year and is far below the experience of the last forty years.

• Meanwhile, the federal deficit as a percent of GDP has also exceeded all our experience through the 1970s. Our view is that there is no easy exit. The price of correcting these trends will be higher interest rates, higher inflation and a weaker dollar.