Tuesday, July 18, 2023

DROWNING IN DEBT

DROWNING IN DEBT

BY JOHN HINDERAKER IN FEDERAL DEBT AND DEFICIT

Back in 2010, we sponsored the Power Line Prize competition. Its purpose was to draw attention to the peril posed by our rapidly growing national debt, by stimulating the production of artistic endeavors–videos, songs, poems, paintings, games, you name it–that would bring the issue to a wide audience. We offered a $100,000 grand prize to the winner of the contest. We recruited an all-star panel of judges to select the winners out of hundreds of entries, and we enlisted other conservative sites to help us promote the contest and count down to the winner, which we announced on Power Line.

The contest was a great success: the top-rated entries received, collectively, millions and millions of page views. One 30-second video, titled “Doorbell,” garnered well over a million views during and after the contest. The competition was won by an animated video featuring squirrels that was titled “The Spending Is Nuts.” Its creator, Justin Folk, has gone on to a stellar career as a producer and director of conservative documentary films.

So the competition was a great success. But it failed utterly to deflect the disastrous trajectory of federal spending.

Everyone who pays attention has known for a long time that our federal government, addicted to spending money it doesn’t have in order to buy votes, is on a path toward bankrupting our children. The downward spiral is accelerating. We may be entering the “then suddenly” phase of our bankruptcy.

ZeroHedge has the numbers:

There was a shocking number in today’s latest monthly US Budget Deficit report. No, it wasn’t that US government outlays unexpectedly soared 15% to $646 billion in June, up almost $100 billion from a year ago…



Rather, the surprise is that at the same time, federal revenues have dropped off dramatically, down over 7% from last year:



The consequences are obvious:

Needless to say, surging government outlays coupled with shrinking tax revenues meant that in June, the US budget deficit nearly tripled from $89 billion a year ago to $228 billion, far greater than the consensus estimate of $175 billion. …

[A]t $1.393 trillion, the fiscal 2022 YTD deficit is already up 170% compared to the same period last year.

All of this means that, as long predicted, servicing our metastasizing debt is beginning to consume the federal budget (i.e., our money):

[T]he one number that was truly shocking was found all the way on page 9, deep inside Table 3 of the latest Treasury Monthly Statement: … which shows that in the 9 months of the current fiscal year, the US has already accumulated a record $652 billion in gross debt interest.

This number was more than 25% higher compared to the Interest Expense payment for the comparable period a year ago, which amounted to $521 billion.

Why is this happening?

Soaring interest rates, driven by the panicked Fed’s scramble to undo its epic policy failure of 2020 and 2021 when the Fed kept rates at zero for far too long while injecting trillions into various asset bubbles, have been the key driver of the deficit, with the Federal Reserve boosting its benchmark rate by 5% since it began hiking in March last year. Five-year Treasury yields are now about 3.96%, versus 1.35% at the start of last year.

The current inflationary surge is dying down, which doesn’t mean that prices are declining but rather that they aren’t rising as rapidly. But the government’s debt service costs haven’t come close to peaking:

As lower-yielding securities mature, the Treasury faces steady increases in the rates it pays on outstanding debt: that’s right – even when the Fed starts cutting rates, due to the delay of rolling over maturing debt, actual interest payments will keep rising for the foreseeable future.

For context, the weighted average interest for total outstanding debt at the end of June was only 2.76%, a level that’s not been surpassed since January 2012, according to the Treasury. That’s up from 1.80% a year before, the department’s data show, and if the Fed indeed keeps rates “higher for longer”, the blended rate on the debt will surpass 4% in one year.

Those rising debt service costs have been incurred and are essentially written in stone.

That would be a complete disaster for the US, and it would mean that interest payments on total US debt of $32.3 trillion would hit $1.3 trillion within 12 months, potentially making interest on the debt the single biggest US government expenditure and surpassing social security!

The Biden administration has nothing to say about any of this. Its monetary policy apparently is, God help us, in the hands of Janet Yellen.

One of the most incompetent puppets in the Biden admin (and there are countless), Treasury Secretary Janet Yellen, has played down concerns about higher rates. She has instead flagged that the ratio of interest payments to GDP, after adjustment for inflation, remains historically low. The problem with Yellen’s argument is that GDP will crater after the next recession (which will also spark the next financial crisis, one which Yellen will not live to see), but US debt will never again drop in either absolute or relative terms, as the good folks at the CBO have been so kind to make clear to even such intellectual midgets as the former Fed chairwoman.

 


It remains to be seen what sort of cataclysm will be required to cause Americans to vote against their own children’s bankruptcy. All we can say for sure is that it hasn’t happened yet. Let’s hope it is not too late.

https://www.powerlineblog.com/archives/2023/07/drowning-in-debt.php

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