Who Pays For This?
Who Pays For This?
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The federal government will run a $3.8 trillion deficit this year and $2.1 trillion next year.
Those estimates, from a budget-focused think tank, don’t include what’s almost certain to be another multi-trillion-dollar stimulus package or two, or three, in the near future.
We’re all just guessing, but when this is all over – however you want to define that – it would not surprise me if the direct federal cost of Covid-19 is something north of $10 trillion.
I’ve heard many people ask recently, “How are we going to pay for that?”
With debt, of course. Enormous, hard-to-fathom, piles of debt.
But the question is really asking, “How will we get out from underneath that debt?”
How do we pay it off?
Three things are important here:
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We won’t ever pay it off.
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That’s fine.
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We’re lucky to have a fascinating history of how this works.
The history starts – as so many important things do – with World War II. It’s the only era in American history with budget figures comparable to today’s.
The budget deficit hit a record in 1943 at 30% of GDP. This year’s deficit, around 19% of GDP, will be equivalent to the deficits run in 1944 and 1945, also during the peak war years. Federal debt as a percentage of GDP is on track to exceed its previous record, set in 1946, next year.
War-time debt in the 1940s freaked people out just like today’s debt does.
In 1944 a University of Illinois economist named Frank Dickson wrote a popular op-ed arguing that the only way the United States could survive economically was to default on its $200 billion of war-time debt. Otherwise, he said, a whole generation would spend their entire careers working to pay off the national debt.
In June of 1944 – a week after D-Day – one Illinois newspaper suggested the debt figures were too absurd to even comment on:
In 1946 the Council of Economic Advisors delivered a report to President Truman warning of “a full-scale depression some time in the next one to four years.” A major reason, they wrote, was the enormity of the national debt that would snuff out all economic progress.
None of it came to pass.
By the early 1980s federal debt as a percent of GDP was at the lowest level in half a century, and below where it was when the war began.
The war was effectively paid off, and the economy boomed in the process.
The calamity never happened.
Here’s what did happen.
FDR told Americans in 1941:
We must fight this threat wherever it appears; and it can be found at the threshold of every home in America.
And so my fellow Americans, I ask you to demonstrate again your faith in America by joining me in investing in the new defense savings bonds and stamps. I know you will help.
The amount of debt needed to finance the war was unlike the nation had seen before
Government spending as a share of GDP rose ten-fold in a decade. Tax revenue rose five-fold:
Deficits were five times higher than anything seen during the New Deal in the 1930s:
Government debt as a share of GDP rose six-fold:
You can imagine how daunting this was at the time. There was no precedent, and it occurred at a time when the Great Depression left everyone fearing the wrath of excessive leverage.
Two things happened at the end of the war.
1. Taxes were kept high. Before the war, tax revenue as a percent of GDP had never been higher than 7.8%. Since the war it’s averaged 14%, and has never gone below 11% in a given year. The top marginal tax rate went from 24% in 1929 to 94% by 1945, and would not drop below 80% for another 20 years.
FDR told the nation in 1941:
It is not a sacrifice for the industrialist or the wage earner, the farmer or the shopkeeper, the trainmen or the doctor, to pay more taxes, to buy more bonds, to forego extra profits, to work longer or harder at the task for which he is best fitted. Rather it is a privilege.
2. Spending never returned to pre-war levels. Before World War I government spending as a share of GDP hovered around 3% per year. During the peak year of the first world war it hit 21%, but quickly fell back closer to historic norms. The second world war was different. Spending surged to more than 43% of GDP in 1944. When the war ended it never reverted back to its pre-war levels, averaging about 17% of GDP – four times its pre-war level – for the next 80 years. Things like the Cold War, the GI bill, and modern infrastructure kept government spending higher than people could ever imagine for longer than people ever expected.
Put those two together and something interesting happened.
By 1985 World War II debt had effectively been “paid off,” with debt to GDP returning to post-war levels. But between 1945 and 1985 the federal government only ran a budget surplus in six years, all of which were basically accounting quirks. Since 1950 federal debt has increased every year.
World War II debt was never repaid, at least at the aggregate level. Old bonds were repaid with new bonds. But debt kept rising.
It was “paid off” in the sense that the economy grew faster than new debt accumulated:
So over time, debt-to-GDP fell even with deficits year after year:
That’s how government debt gets repaid after it piles up. You don’t pay it off. You grow your way out of it.
This isn’t intuitive because it doesn’t apply to people. When a person takes out a mortgage or a car loan, there’s a repayment date. But that’s only because people have finite careers and lifespans, so there’s an “end date” where all debts have to be repaid.
Countries (and to some extent companies) are different. They have indefinite lives. So they can remain indebted indefinitely, even with rising debt.
As long as nominal GDP growth is higher than the annual budget deficit, debt to GDP goes down, and spending more than you take in leaves you with a lower debt burden.
This is so simple, but it’s easily overlooked because it doesn’t apply to people.
What matters for countries isn’t the amount of debt they hold. It’s how burdensome that debt is to maintain over time.
The burden of our national debt – interest payments as a share of GDP – has been in a fairly tight range since the end of World War II. The burden wasn’t much different in 1950, when debt was near its peak, than in 1940, before the war began. It’s at about the same level today, 80 years later:
As many panicked at our national debt at the end of the war, a 1945 article in The Wall Street Journal was prescient. “There is little likelihood that the national debt will be reduced substantially during the next generation,” it read. “This means that debt management rather than debt reduction is the important problem before the Treasury in the coming years.”
Same thing today.
History never repeats. We can’t assume we’ll be able to grow out of Covid-19 debt like we World War II. A lot of things globally and demographically happened after the war that gave a tailwind to growth. Some of those forces are now headwinds.
There are so many questions.
Will interest rates stay low?
Will we avoid another catastrophe that requires trillions of new debt?
How much of growing out of our debt will be inflation vs. real growth?
I don’t know the answers. No one does.
But when people say, “We’re leaving this debt for our kids and grandkids to repay.” Well … probably not.
This isn’t a mortgage that has to be paid in full by a specific date. Without repaying a cent of the debt, its burden could easily be less in another generation than it is today.
We’re all guessing. But my best guess is that sometime in the next few years we’ll have the biggest tax increase since the end of World War II, regardless of who’s president. Spending will come down from current levels but stay higher than it was before the crisis as enhanced unemployment benefits become permanent. Debt will never actually decline; it will rise every year.
But if we’re lucky – that’s the right word – the panic-induced innovation that comes from Covid-19 will spark enough eventual prosperity to let us maintain or grow out of this debt, like we have before.
(All data from Office of Management And Budget and Federal Reserve).
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Key shipping company files for Chapter 11 bankruptcy
The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.
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The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.
The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.
Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible
Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.
The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.
Lawsuits force companies to liquidate in bankruptcy
Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.
California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.
The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.
The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.
In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.
Shutterstock
Nationwide Cargo seeks to reorganize its business
Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.
The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.
Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)
The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023. From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy pandemic covid-19 stocksUncategorized
Key shipping company files Chapter 11 bankruptcy
The Illinois-based general freight trucking company filed for Chapter 11 bankruptcy to reorganize.
Share this:
The U.S. trucking industry has had a difficult beginning of the year for 2024 with several logistics companies filing for bankruptcy to seek either a Chapter 7 liquidation or Chapter 11 reorganization.
The Covid-19 pandemic caused a lot of supply chain issues for logistics companies and also created a shortage of truck drivers as many left the business for other occupations. Shipping companies, in the meantime, have had extreme difficulty recruiting new drivers for thousands of unfilled jobs.
Related: Tesla rival’s filing reveals Chapter 11 bankruptcy is possible
Freight forwarder company Boateng Logistics joined a growing list of shipping companies that permanently shuttered their businesses as the firm on Feb. 22 filed for Chapter 7 bankruptcy with plans to liquidate.
The Carlsbad, Calif., logistics company filed its petition in the U.S. Bankruptcy Court for the Southern District of California listing assets up to $50,000 and and $1 million to $10 million in liabilities. Court papers said it owed millions of dollars in liabilities to trucking, logistics and factoring companies. The company filed bankruptcy before any creditors could take legal action.
Lawsuits force companies to liquidate in bankruptcy
Lawsuits, however, can force companies to file bankruptcy, which was the case for J.J. & Sons Logistics of Clint, Texas, which on Jan. 22 filed for Chapter 7 liquidation in the U.S. Bankruptcy Court for the Western District of Texas. The company filed bankruptcy four days before the scheduled start of a trial for a wrongful death lawsuit filed by the family of a former company truck driver who had died from drowning in 2016.
California-based logistics company Wise Choice Trans Corp. shut down operations and filed for Chapter 7 liquidation on Jan. 4 in the U.S. Bankruptcy Court for the Northern District of California, listing $1 million to $10 million in assets and liabilities.
The Hayward, Calif., third-party logistics company, founded in 2009, provided final mile, less-than-truckload and full truckload services, as well as warehouse and fulfillment services in the San Francisco Bay Area.
The Chapter 7 filing also implemented an automatic stay against all legal proceedings, as the company listed its involvement in four legal actions that were ongoing or concluded. Court papers reportedly did not list amounts for damages.
In some cases, debtors don't have to take a drastic action, such as a liquidation, and can instead file a Chapter 11 reorganization.
Shutterstock
Nationwide Cargo seeks to reorganize its business
Nationwide Cargo Inc., a general freight trucking company that also hauls fresh produce and meat, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Illinois with plans to reorganize its business.
The East Dundee, Ill., shipping company listed $1 million to $10 million in assets and $10 million to $50 million in liabilities in its petition and said funds will not be available to pay unsecured creditors. The company operates with 183 trucks and 171 drivers, FreightWaves reported.
Nationwide Cargo's three largest secured creditors in the petition were Equify Financial LLC (owed about $3.5 million,) Commercial Credit Group (owed about $1.8 million) and Continental Bank NA (owed about $676,000.)
The shipping company reported gross revenue of about $34 million in 2022 and about $40 million in 2023. From Jan. 1 until its petition date, the company generated $9.3 million in gross revenue.
Related: Veteran fund manager picks favorite stocks for 2024
bankruptcy pandemic covid-19 stocksUncategorized
Tight inventory and frustrated buyers challenge agents in Virginia
With inventory a little more than half of what it was pre-pandemic, agents are struggling to find homes for clients in Virginia.
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No matter where you are in the state, real estate agents in Virginia are facing low inventory conditions that are creating frustrating scenarios for their buyers.
“I think people are getting used to the interest rates where they are now, but there is just a huge lack of inventory,” said Chelsea Newcomb, a RE/MAX Realty Specialists agent based in Charlottesville. “I have buyers that are looking, but to find a house that you love enough to pay a high price for — and to be at over a 6.5% interest rate — it’s just a little bit harder to find something.”
Newcomb said that interest rates and higher prices, which have risen by more than $100,000 since March 2020, according to data from Altos Research, have caused her clients to be pickier when selecting a home.
“When rates and prices were lower, people were more willing to compromise,” Newcomb said.
Out in Wise, Virginia, near the westernmost tip of the state, RE/MAX Cavaliers agent Brett Tiller and his clients are also struggling to find suitable properties.
“The thing that really stands out, especially compared to two years ago, is the lack of quality listings,” Tiller said. “The slightly more upscale single-family listings for move-up buyers with children looking for their forever home just aren’t coming on the market right now, and demand is still very high.”
Statewide, Virginia had a 90-day average of 8,068 active single-family listings as of March 8, 2024, down from 14,471 single-family listings in early March 2020 at the onset of the COVID-19 pandemic, according to Altos Research. That represents a decrease of 44%.
In Newcomb’s base metro area of Charlottesville, there were an average of only 277 active single-family listings during the same recent 90-day period, compared to 892 at the onset of the pandemic. In Wise County, there were only 56 listings.
Due to the demand from move-up buyers in Tiller’s area, the average days on market for homes with a median price of roughly $190,000 was just 17 days as of early March 2024.
“For the right home, which is rare to find right now, we are still seeing multiple offers,” Tiller said. “The demand is the same right now as it was during the heart of the pandemic.”
According to Tiller, the tight inventory has caused homebuyers to spend up to six months searching for their new property, roughly double the time it took prior to the pandemic.
For Matt Salway in the Virginia Beach metro area, the tight inventory conditions are creating a rather hot market.
“Depending on where you are in the area, your listing could have 15 offers in two days,” the agent for Iron Valley Real Estate Hampton Roads | Virginia Beach said. “It has been crazy competition for most of Virginia Beach, and Norfolk is pretty hot too, especially for anything under $400,000.”
According to Altos Research, the Virginia Beach-Norfolk-Newport News housing market had a seven-day average Market Action Index score of 52.44 as of March 14, making it the seventh hottest housing market in the country. Altos considers any Market Action Index score above 30 to be indicative of a seller’s market.
Further up the coastline on the vacation destination of Chincoteague Island, Long & Foster agent Meghan O. Clarkson is also seeing a decent amount of competition despite higher prices and interest rates.
“People are taking their time to actually come see things now instead of buying site unseen, and occasionally we see some seller concessions, but the traffic and the demand is still there; you might just work a little longer with people because we don’t have anything for sale,” Clarkson said.
“I’m busy and constantly have appointments, but the underlying frenzy from the height of the pandemic has gone away, but I think it is because we have just gotten used to it.”
While much of the demand that Clarkson’s market faces is for vacation homes and from retirees looking for a scenic spot to retire, a large portion of the demand in Salway’s market comes from military personnel and civilians working under government contracts.
“We have over a dozen military bases here, plus a bunch of shipyards, so the closer you get to all of those bases, the easier it is to sell a home and the faster the sale happens,” Salway said.
Due to this, Salway said that existing-home inventory typically does not come on the market unless an employment contract ends or the owner is reassigned to a different base, which is currently contributing to the tight inventory situation in his market.
Things are a bit different for Tiller and Newcomb, who are seeing a decent number of buyers from other, more expensive parts of the state.
“One of the crazy things about Louisa and Goochland, which are kind of like suburbs on the western side of Richmond, is that they are growing like crazy,” Newcomb said. “A lot of people are coming in from Northern Virginia because they can work remotely now.”
With a Market Action Index score of 50, it is easy to see why people are leaving the Washington-Arlington-Alexandria market for the Charlottesville market, which has an index score of 41.
In addition, the 90-day average median list price in Charlottesville is $585,000 compared to $729,900 in the D.C. area, which Newcomb said is also luring many Virginia homebuyers to move further south.
“They are very accustomed to higher prices, so they are super impressed with the prices we offer here in the central Virginia area,” Newcomb said.
For local buyers, Newcomb said this means they are frequently being outbid or outpriced.
“A couple who is local to the area and has been here their whole life, they are just now starting to get their mind wrapped around the fact that you can’t get a house for $200,000 anymore,” Newcomb said.
As the year heads closer to spring, triggering the start of the prime homebuying season, agents in Virginia feel optimistic about the market.
“We are seeing seasonal trends like we did up through 2019,” Clarkson said. “The market kind of soft launched around President’s Day and it is still building, but I expect it to pick right back up and be in full swing by Easter like it always used to.”
But while they are confident in demand, questions still remain about whether there will be enough inventory to support even more homebuyers entering the market.
“I have a lot of buyers starting to come off the sidelines, but in my office, I also have a lot of people who are going to list their house in the next two to three weeks now that the weather is starting to break,” Newcomb said. “I think we are going to have a good spring and summer.”
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Part 1: Current State of the Housing Market; Overview for mid-March 2024
Tight inventory and frustrated buyers challenge agents in Virginia
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