By now, I’m sure you’ve heard that on May 16^th, Moody’s downgraded America’s credit rating.  Previously at a top-tier “triple-A” rating at Moody’s, on the 16^th, they reduced America’s credit rating by one notch down to Aa1, for reasons such as “persistent and growing debt and deficits”, “rising interest payments” needed to carry the debt, and finally, a “lack of effective measures to reverse these trends.”   Well, if the above comments don’t worry you, keep reading.  By the time you’re done with today’s blog, I believe you will be very, very worried.   For good reason. 

Yes, that’s right:   Today’s blog is a little bit of a “Debbie downer” blog.   I apologize in advance.  

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

 

A reminder:  This is an economic blog.   This notwithstanding, I suspect at times my readers are convinced I have surreptitiously woven my own political views into the blog but, rest assured, that is never my intention.   Of course, just like you, I do have political views, but I feel this blog is an inappropriate forum in which to share them.   Perhaps some day I will write a political blog and I’ll share my thoughts there.

No, that will never happen.   I write this blog because I am passionate about economics and finance (I know!  Weird, right?).   Politics?   You can keep it.  I am not a fan of politics.   Or politicians in general. 

So when I share facts with you, like the ones that will follow shortly, I’m sharing them because they are facts.  Not opinions – facts.  If you feel they are politically charged, for some reason, then that’s on you.   Just sayin’.  🙂

 

Consider these facts. 

 

Trump was first elected as the US President in November of 2016.   He took office in January, 2017.   Biden was elected in November of 2020.   He took office in January of 2021.   Trump’s second term began in January of 2025.

What was the amount of the “total gross national debt” of the United States of America as each of these three (3) presidential terms began?   Here are the facts – here are the numbers:

January 2, 2017:            $19.9 Trillion.

January 4, 2021:            $27.7 Trillion.

January 3, 2025:            $36.1 Trillion.

 

In just 8 years, our national debt increased by over 80%.   Staggering.  Sure, there were reasons.  Covid was a big contributor.   But 80%.   Wow.   Staggering.   The above numbers, by the way, are sourced from the US Treasury Department’s website entitled “Debt to the Penny.”    Here’s a link if you are curious to see more:

https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny

For my second “by the way,” I’ll add this.   Remember that the “debt held by the public is a much lower number.   For example, while the total gross national debt is $36.2 trillion today, the debt held by the public is $28.8 trillion – significantly lower.   The difference between the two numbers is what we call “intragovernmental holdings.”   Look it up.   It’s a meaningful distinction and one worth understanding.  For these purposes today, however, we will focus on the public debt number. 

How much interest did the US Treasury pay to the holders of public debt in the prior fiscal year?   $882 billion.   Because both the size of our debt and interest rates, generally, have increased, this number will be higher in the 2025 fiscal year.   How much higher?   The CBO – the Congressional Budget Office – forecasts interest expense this year will increase to $952 billion.   Yes, the interest to carry our public debt will cost about $1 trillion this year.   Amazing.

The good news here – if you’re looking for some – is the fact that the US Treasury has absolutely no problem paying interest.   The Treasury borrows in dollars, repays in dollars, pays interest in dollars … and can essentially ‘print‘ dollars when they need more dollars.   They simply pay it – electronically – and then borrow that amount of interest – electronically – by piling it on top of the public debt previously owed.   And that, unfortunately, is where our good news becomes bad. 

Essentially, that is why Moody’s downgraded our credit rating.   Of the 3 credit rating agencies, they were the last to do so.   Moody’s held out the longest.   Fitch and S&P downgraded the US Treasury’s credit rating long ago.   S&P lowered the rating all the way back in 2011.   Fitch did the same in August of 2023. 

When was the last time Moody’s lowered America’s credit rating?   Never.  This is a first.  Not since Moody’s first gave the US government a credit rating in 2017 has Moody’s lowered America’s credit rating.  

Let’s return to the debt number itself.   And again, remember, we’re talking about the “debt owed to the public” – not because it’s smaller, but because in my opinion, it’s more worrisome as it must actually be repaid somehow and someday.    Consider this image:

 

 

This forecast has Moody’s worried.  Very worried.   Worried enough to lower America’s credit rating.   Let’s take a closer look. 

First, note this image presents the debt held by the public – which we’ll call ‘public debt’ – as a percentage of GDP.  While the two metrics are not directly correlated, this is a useful way to think about public debt.   Public debt skyrocketed during WW2.   The US had the finance the war effort – as a country always does – using public debt.   Post WW2, as you can see, public debt as a percentage of US annual GDP shrunk year after year until around 1975.  Thereafter, it began to rise again.  For a couple of big reasons:  Once again, the US used public debt to finance a war – in this case, the one in Vietnam.   And with inflation running amuck during the late 1970s – by 1980, the CPI had reached 13.5%.   And this was after clocking in at 9.1% in 1975 and 11.3% in 1979.  

In 1980, the “average” interest rate paid by the Treasury on the 10-year Treasury note was 11.43%.  Ouch.   Yes, you read right.  Almost 11.5%.  At that rate, interest accumulates rather quickly.   And thus began the current expansion of the public debt at a faster rate than GDP growth.   Thus, each year, even as America’s economy grew meaningfully, our public debt – as a percentage of that GDP growth – grew faster.  

Today, with US ‘nominal’ GDP knocking on the door of $30 trillion, our public debt at $28.8 trillion is just below 100%.   It’s close enough, frankly, to just say they are about 1 to 1. 

So where do we go from here?   As we see above, the CBO is forecasting public debt growth will continue to significantly outstrip GDP growth.  

Will it?   The three credit rating agencies seem to think so.  It’s pretty clear that their credit downgrades suggest that America’s politicians will not fix this problem – at least, not easily or without a lot of pain to the average American.  Can the problem be rectified?   Sure.  This is a big, complex puzzle with many moving parts.  Frankly, in my opinion, not only can the problem be fixed, but I believe it will be fixed.   I just don’t know when.   But I do believe I know how.  

I discussed one possible method in a prior blog.   Essentially, I suggested we grow out way out of the problem.   If we can achieve an annual 4% ‘nominal’ growth rate in GDP – which is possible as this equals a 2% ‘real’ growth rate – and at the same time hold spending growth to a minimum, it is possible for tax revenue growth to overtake spending in about 10 years.   The math works.

Another idea, floated by our new Secretary of the Interior Doug Burgum is that America “monetize its balance sheet.”   Balance sheet?   Yes, as I discussed in a blog post, the United states owns 28% of the United States in total and the vast majority of the western states.   I discussed these land holdings in greater detail in my blog:

https://steakhouseindex.com/shi-1-22-25-home-on-the-range/

It’s worth another look.   It’s also worth noting that my blog does not mention under-sea assets controlled by the Department of the Interior.   Apparently, there are significant mining and extraction opportunities there as well.  In any event, Doug’s idea is that America sign lease or royalty deals with companies that wish to extract, mine or harvest America’s natural resources both on land and under the oceans.   Doug claims the US has about $100 trillion (or more) in assets, and we should be generating an ROI on those assets.  Assuming the US could generate even a 1% ROI on these assets, then in the aggregate, America could earn $1 trillion per year from it’s balance sheet.   Per year!   Interesting.  

The bottom line:   Without draconian cuts to mandatory spending, the US can potentially solve this problem over time.   Our politicians, of course, need to figure out how.   If they call me, I’ll help offer a few ideas.  🙂

Is this debt problem unique to the United States?   No, not really.  However, what is somewhat unique is the sheer size of the annual deficit, as a percentage of the outstanding public debt.  That percentage is exceptionally high, when compared to most other developed nations. 

Click here to see how debt levels and interest rates compare in other advanced economic countries.  

Interestingly, Japan’s problem is greater than ours.   At first glance, they are in serious trouble:   Their sovereign debt, at the end of 2024, was almost $8.7 trillion.  So with a GDP near $4.2 trillion, their debt/GDP ratio is almost 220%.  Interestingly, over 43% of this debt – known as Japanese Government Bonds, or JGBs – is owned by the Bank of Japan (BOJ).   Follow me here:   The BOJ “sells” JGBs to the general public and then “buys” 43% of them.   That’s right.   They are both seller and buyer.   

Additionally, another 20% or so is owned by other Japanese government agencies for pensions and their postal savings plans.    So, as it turns out, less than 40% of their total debt is owned by the public!  This is a tool many central banks have used over the years, for a variety of reasons, to increase money supply but in Japan the idea was to cure their deflation problem.  Oddly enough, they have not been overly successful:   They have achieved mild inflation in some years, but whatever nascent inflation they create doesn’t seem to stick – even as money supply increased dramatically.  

The bottom line here:   The BOJ could simply forgive the debt they hold and dramatically shrink their outstanding balance of debt.    Here in the US, our problem is more dire.    Sure, our central bank, too, holds treasury debt (and similar assets) totaling almost $6.7 trillion.   And, in theory, the FED could do the same thing.   But, of course, in both cases that would be very unconventional. 

I’ll leave it here for now.   I hope I didn’t worry you too much … let’s head to the steakhouses!

 

 

Once again, reservation demand remains relatively strong.   Note I used the word “relatively?”   That’s because some markets — such as the OC — are actually reflecting tepid reservation demand to say about a year ago.   Take a look at the long-term trend chart:

 

 

 

On 5/21/2025 the SHI for “The OC” was 23.   One year ago, on 5/22/2024 the SHI was 47.   The OC used to consistently hover closer to 47 … these days, the low- to mid-20s are far more common.   What does that mean, economically speaking?  Well, clearly, the local economy is not as strong as it was a year ago.   Frankly, over all, the SHI40 seems to be suggesting the entire US economy isn’t as strong as just 1 year ago.  That said, I don’t feel conditions are deteriorating … just stabilizing at a lower level.  

Good news?   Bad news?   Time will tell.  

But I do believe we need to maintain strong GDP growth to help grow out way out of this debt and deficit problem.   Fingers crossed. 

<—— Terry Liebman —–>