Casey Jones might as well be at the throttle. Certainly, there’s nothing slow-motion about Uncle Sam’s financial train wreck. The crisis is broadly consequential. In the eleven months through August, net interest on the national debt has hit $630 billion, with $69 billion paid last month. It will end the full year at double the $351 billion paid just two years ago in fiscal 2021.
The increase is stunning, but predictable. So too is next year’s increase. With the Federal Reserve keeping rates “higher for longer,” net interest will hit almost $850 billion next year and top $1 trillion in fiscal 2025, if the current interest rate environment persists.
The environment may not persist, since debt throughout the economy is repricing at interest rates that are multiples higher than those prevailing in the easy-money decade of the 2010s. Businesses and consumers may buckle under the burden, bringing recession and lower rates, despite current economic commentary to the contrary that sees, instead, a “soft landing” ahead.
The skyrocketing rise in interest costs has some of the fascination of a runaway freight train, transfixing observers. Yet, we should ignore the spectacle to focus instead upon the damage being wrought on the government itself by the runaway freight and upon the risk that other related calamities may eventuate, such as widespread delinquency and default on consumer debt.
Start, though, with discretionary federal spending capacity. Most federal spending is mandatory. Social Security benefits are set by law; so are Medicare and Medicaid benefits. Apart from these programs, there remains only about $1.7 trillion of “discretionary” spending, about half defense spending.
All other things being equal, a $350 billion increase in interest expense implies an offsetting equal decrease in discretionary spending, reducing it by 20%.
The reduction is unlikely to hit the Pentagon budget. Whether it is labeled Ukraine assistance or as expenditures needed to replenish stocks of weaponry depleted by such assistance, substantial additional spending will be required just to restore and maintain current defense capability. Suffice it to say that Vladimir Putin and Xi Jin Ping and Ayatollah Khamenei will be watching negotiations over the Pentagon budget very closely.
Holding defense spending constant implies that the entire $350 reduction would hit discretionary domestic spending, which would absorb a stunning 40% reduction. That prospect explains the fraught nature of current budget negotiations in Washington, as well as the likelihood that failed negotiations will lead to a government shutdown.
Also a casualty of the runaway train is Uncle Sam’s capacity to provide fiscal stimulus if the economy does fall into recession. With a current $2 trillion rate of deficit spending (and borrowing), any stimulus money would have to come from additional borrowing. In a recession, tax revenue would decline and even more money would have to be borrowed to replace the disappearing tax revenue.
The tripartite borrowing would be enormous in aggregate and generate substantial additional interest costs, no matter the level of interest rates at the time. Simply put, the Biden administration has ushered in a debt doom loop, with massive interest costs requiring more borrowing just to pay those costs, and, then, even more borrowing to pay interest on the new debt. The nation is past the point where adjustments could have been made on a relatively painless basis.
Yet, Uncle Sam is not the only victim of Biden’s reckless train-conducting. Many commercial real estate projects are financed with mortgages much shorter than the 30-year term of home mortgages. Many new office buildings (many offices are vacant due to remote work) and apartment projects were financed at super-low rates prevailing during the easy-money decade of the 2010s.
In coming years, projects will have to be refinanced at much higher rates, rendering some uneconomic. Lenders will wind up taking back some properties; bad assets will balloon on bank balance sheets. Some banks are sure to get in trouble – perhaps precipitating a banking crisis, which the feds might strain to contain.
Consumers are already facing dramatically increased financial pressure. Aggregate credit card debt recently hit a record high of $1 trillion, up from $770 billion in the first quarter of 2021. Moreover, the average interest rate on credit card balances has skyrocketed. From a long-ago high of about 16% in the 1990s, average bank credit card rates declined thereafter to the low teens during the easy-money 2010s until jumping suddenly in 2022 to 19% and, thereafter, over 20%.
The world’s major economies – including China and the European Union are overloaded with debt. Debt problems overseas compound America’s debt problem.
The U.S. must make painful adjustments now, starting with rolling back Biden’s profligate spending which has added about $5 trillion to the nation’s publicly held debt since his inauguration. The runaway Biden express has fueled inflation, jacked up interest rates and pushed the debt to a towering $26.1 trillion.