For the old timers in here, it seems like just yesterday that the US national debt was “only” pushing $6 trillion. Then, between the ‘war on terror’ and QE which made a mockery of moral hazard, America has now reached a grim financial milestone – as the national debt tops $31 trillion for the first time, according to a new Treasury Department report.
The record-high debt comes as historically low interest rates have turned into higher borrowing costs, as the Fed attempts to tame the inflation they, the banks, and the ‘blank check’ dinosaurs leading the country – have caused.
And, of course, the only reason they’ve been able to pull this off without (until recently) massive, consumer-scorching inflation is because the dollar is still the global reserve currency.
“So many of the concerns we’ve had about our growing debt path are starting to show themselves as we both grow our debt and grow our rates of interest,” said Michael Peterson, CEO of the Peter G. Peterson Foundation, in a statement to the NY Times. “Too many people were complacent about our debt path in part because rates were so low.”
Higher rates could add an additional $1 trillion to what the federal government spends on interest payments this decade, according to Peterson Foundation estimates. That is on top of the record $8.1 trillion in debt costs that the Congressional Budget Office projected in May. Expenditures on interest could exceed what the United States spends on national defense by 2029, if interest rates on public debt rise to be just one percentage point higher than what the C.B.O. estimated over the next few years.
The Fed, which slashed rates to near zero during the pandemic, has since begun raising them to try to tame the most rapid inflation in 40 years. Rates are now set in a range between 3 and 3.25 percent, and the central bank’s most recent projections saw them climbing to 4.6 percent by the end of next year – up from 3.8 percent in an earlier forecast. -NYT
As Michael Maharrey of SchiffGold notes; So What?
[T]here is no end to the borrowing and spending in sight. In August alone, the US government ran a massive $219.6 billion budget deficit.
While spending has slowed somewhat with the end of pandemic-era programs, the Biden administration continues to burn through roughly half-a-trillion dollars every single month. With one month left in the fiscal year, the government has spent just over $5.35 trillion.
And there is more spending coming down the pike.
The US government is still handing out COVID stimulus and it wants more. Congress recently pushed through another massive spending bill. Meanwhile, the US continues to shower money on Ukraine and other countries around the world. And we haven’t begun to see the impact of student loan forgiveness.
On top of increased spending, rising interest rates will balloon the debt even more.
Every increase in interest rate raises the federal government’s interest expense. So far in fiscal 2022, the US Treasury has forked out $471 billion just to fund the government’s interest payments.
To put that number into context, at this point in fiscal 2021 the Treasury’s interest expense stood at $356 billion. That represents a 30% year-on-year increase. Interest expense ranks as the sixth largest budget expense category, about $250 billion below Medicare. If interest rates remain elevated or continue rising, interest expenses could climb rapidly into the top three federal expenses.
According to the Congressional Budget Office, this is exactly what will happen. It projects interest payments will triple from nearly $400 billion in fiscal 2022 to $1.2 trillion in 2032. And it’s worse than that. The CBO made this estimate in May. Interest rates are already higher than those used in its analysis.
Most people just shrug off the ever-growing national debt. When we talk about the soaring debt, the answer is, “So what?” They figure if it hasn’t mattered yet, it won’t matter tomorrow. But you can only kick the debt can down the road so far before you run out of road.
The Problem of Debt
James Madison considered debt part of a trifecta of tools government uses to oppress the people.
Armies, and debts, and taxes are the KNOWN INSTRUMENTS for putting the many under the domination of the few.”
So, how will this enormous massive debt actually impact our lives?
In the first place, a large national debt stunts economic growth.
According to the National Debt Clock, the debt to GDP ratio is 125.12%. Studies have shown that a debt-to-GDP ratio of over 90% retards economic growth by about 30%. This throws cold water on the conventional “spend now, worry about the debt later” mantra, along with the frequent claim that “we can grow ourselves out of the debt” now popular on both sides of the aisle in DC.
More immediately, the national debt is a big problem for the Federal Reserve as it drives up interest rates hoping to tame inflation.
The US government can’t keep borrowing and spending without the Fed monetizing the debt. It needs the central bank to buy Treasuries to prop up demand. Without the Fed’s intervention in the bond market, prices will tank, driving interest rates on US debt even higher.
That means the Fed can’t win this inflation fight. And that means you had better get used to spending more on everything.
A paper published by the Kansas City Federal Reserve Bank acknowledged that the central bank can’t slay inflation unless the US government gets its spending under control. In a nutshell, the authors argue that the Fed can’t control inflation alone. US government fiscal policy contributes to inflationary pressure and makes it impossible for the Fed to do its job.
Trend inflation is fully controlled by the monetary authority only when public debt can be successfully stabilized by credible future fiscal plans. When the fiscal authority is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt. As a result, a large fiscal imbalance combined with a weakening fiscal credibility may lead trend inflation to drift away from the long-run target chosen by the monetary authority.”
This clearly isn’t in the cards.
In other words, when it comes to fighting inflation, the Fed is bluffing because it’s holding a losing hand. The rising interest on the debt will force the national debt will force the central bank to surrender to inflation.
In the long run, unbridled borrowing and spending will drive inflation to the point that people lose faith in the dollar. There is already talk of a “post-dollar” world.
The bottom line is debt isn’t without consequences. And the consequences will be severe when the chickens come home to roost.
via zerohedge
