{"id":5697,"date":"2023-11-23T09:34:05","date_gmt":"2023-11-23T16:34:05","guid":{"rendered":"https:\/\/jasonsblog.ddns.net\/?p=5697"},"modified":"2023-11-23T09:34:05","modified_gmt":"2023-11-23T16:34:05","slug":"americas-runaway-debt-scenario-1-trillion-in-interest-per-year","status":"publish","type":"post","link":"https:\/\/jasonsblog.ddns.net\/index.php\/2023\/11\/23\/americas-runaway-debt-scenario-1-trillion-in-interest-per-year\/","title":{"rendered":"America\u2019s Runaway Debt Scenario: $1 Trillion in Interest per Year"},"content":{"rendered":"\n

The expense to service this debt is staggering, and even if you’re a responsible person that doesn’t carry credit card debt having to pay interest, a sizeable chunk of your tax dollars are in effect paying interest for the nation’s credit card in the hands of our feckless leadership.<\/p>\n\n\n\n

https:\/\/www.theepochtimes.com\/article\/americas-runaway-debt-scenario-1000000000000-in-interest-5531738?utm_source=partner&utm_campaign=TheLibertyDaily&src_src=partner&src_cmp=TheLibertyDaily<\/a><\/p>\n\n\n

<\/div><\/div><\/div>\n\n\n
America’s debt spiral could devolve into a fiscal crisis or hyperinflation, several economists say.<\/h5>\n\n\n\n

By Petr Svab<\/p>\n\n\n\n

The U.S. federal government has borrowed so much money that, over the past year, it has had to spend one-fifth of all the money it collected just on debt interest\u2014which came to almost $880 billion.<\/p>\n\n\n\n

Americans paid some $450 billion less in income taxes for the year, trapping the government in the pincers of a fiscal crunch.<\/p>\n\n\n\n

The country teeters on the brink of a debt spiral that could devolve into a fiscal crisis or hyperinflation, several economists told The Epoch Times.<\/p>\n\n\n\n

\u201cThe problem is serious because, any way you cut it, taxpayers are paying interest on the mountain of debt that has been accumulated,\u201d said Steve Hanke, a professor of applied economics at Johns Hopkins University. \u201cIn short, they are paying something for nothing.\u201d<\/p>\n\n\n\n

Congress must dramatically curb deficit spending to instill confidence in investors\u2014who seem to be losing faith in America\u2019s ability to satisfy its obligations, some suggest.<\/p>\n\n\n\n

\u201cDeficit spending by the U.S. government is in a runaway scenario,” said Mark Thornton, a senior fellow at the classical liberal Mises Institute. “The amount of money that they’re borrowing is at extremely elevated levels and there doesn\u2019t seem to be any regulation or even mild attempts to curb the spending side of the fiscal equation.\u201d<\/p>\n\n\n\n

\"
The U.S. Treasury building in Washington on March 13, 2023. The Treasury joined other government financial institutions to bail out Silicon Valley Bank’s account holders after it collapsed. (Chip Somodevilla\/Getty Images)<\/figcaption><\/figure>\n\n\n\n

Gigantic Debt<\/h2>\n\n\n\n

Government debt stood above $33 trillion in fiscal year 2023 (the 12 months that ended on Sept. 30). That\u2019s about $1.7 trillion more than the year before. Interest on the debt has been growing steadily for decades, although at a relatively slow pace to about $570 billion in 2019 from about $350 billion in 1995\u2014an annual increase of some 2 percent.<\/p>\n\n\n\n

With the explosion of government spending during the COVID-19 pandemic and the subsequent interest rate increases by the Federal Reserve, the debt cost has skyrocketed by more than 50 percent between 2019 and 2023. Over the past year, it has already surpassed the entire military budget.<\/p>\n\n\n\n

The cost is expected to keep growing as old debt issued at low interest rates matures and is rolled over into higher rates.<\/p>\n\n\n\n

While the government pays some of the interest to itself, as it holds about 20 percent of the debt in various trusts and funds, interest from that portion of the debt is supposed to pay for future expenses of programs such as Medicare and Social Security.<\/p>\n\n\n\n

\u201cThat money is already slated to go out the door. It just hasn\u2019t gone out the door yet,\u201d said E.J. Antoni, an economist and research fellow at conservative think tank The Heritage Foundation.<\/p>\n\n\n\n

\u201cIt\u2019s not as if the government has that cash on hand to spend.\u201d<\/p>\n\n\n\n

Even with that income counted in, the Medicare Hospital Insurance and Social Security funds are expected to run out of money in about 10 years, according<\/a> to the Congressional Budget Office.<\/p>\n\n\n\n

\"
The National Debt Clock in Washington on Nov. 13, 2023.(Madalina Vasiliu\/The Epoch Times)<\/figcaption><\/figure>\n\n\n\n

Who Pays?<\/h2>\n\n\n\n

Proponents of large government deficit spending have argued that servicing the debt isn\u2019t much of a worry since the Fed can print the cash necessary to cover the interest or even buy up the debt. The Treasury would then pay the interest on the debt to the Fed, which would then use the money to cover the cost of its operations and send the surplus back to the Treasury. The government would, in effect, pay the interest to itself.<\/p>\n\n\n\n

Indeed, about 20 percent of the government debt is held by the Fed already.<\/p>\n\n\n\n

However, the reality doesn\u2019t necessarily follow this logic.<\/p>\n\n\n\n

\u201cThe Federal Reserve doesn\u2019t actually make money anymore,” Mr. Antoni said. “They lose money because so much of the Treasuries that they have on the books right now [were] purchased in 2020 and even early 2021 when rates were near zero, so those assets are earning almost nothing,”<\/p>\n\n\n\n

Anything the Fed does collect on its portfolio, it immediately pays out to banks and money market funds in interest on reserves and reverse repurchase agreements. The point of those operations is to stem inflation\u2014\u201ckeeping liquid cash locked in its vaults so that it can\u2019t multiply in the banking system,\u201d he said.<\/p>\n\n\n\n

These operations now cost the central bank some $700 million per day, forcing it into a \u201chuge deficit,\u201d Mr. Antoni said.<\/p>\n\n\n\n

\u201cIt\u2019s not sending Treasury a dime.\u201d<\/p>\n\n\n\n

\"
The US Treasury Department building in Washington on Jan. 19, 2023. The Treasury announced it had begun taking measures to prevent a default on government debt. (SAUL LOEB\/AFP via Getty Images)<\/figcaption><\/figure>\n\n\n\n

For the same reason, the Fed seems to lack the appetite for more government debt. Over the past year and a half, it has been slowly reducing its debt holdings, siphoning cash out of the market to curb inflation.<\/p>\n\n\n\n

\u201cAny time the Fed buys something, they do it with money that\u2019s being created for that purpose,\u201d he said.<\/p>\n\n\n\n

\u201cThe Fed actually doesn\u2019t have an account with any balance. Their checking account literally has zero balance so when they sell an asset, the money that goes into that account is extinguished. When they buy an asset, the money that comes out of that account is just created.\u201d<\/p>\n\n\n\n

\"<\/a><\/figure>\n\n\n\n

If the Fed were to buy more debt, it would increase the money supply, summoning the specter of inflation even as it\u2019s trying to banish it.<\/p>\n\n\n\n

\u201cWe would be right back on the inflation treadmill,\u201d Mr. Antoni said.<\/p>\n\n\n\n

Bad Credit?<\/h2>\n\n\n\n

If the government wants to borrow without worsening inflation, it needs to find somebody to buy the debt with existing dollars.<\/p>\n\n\n\n

Until recently, that hasn\u2019t been a problem. Despite offering measly interest, U.S. Treasurys served as a safe haven investment\u2014a hedge against risk and an indispensable collateral in complex investment schemes in financial markets.<\/p>\n\n\n\n

\u201cU.S. Treasurys were seen as the safest asset. And increasingly that\u2019s not the case today,\u201d Mr. Antoni said.<\/p>\n\n\n\n

\"
People walk past the New York Stock Exchange on Wall Street in New York City on March 23, 2021. (ANGELA WEISS\/AFP via Getty Images)<\/figcaption><\/figure>\n\n\n\n

In August, the Fitch rating firm downgraded U.S. debt to AA+ from AAA.<\/p>\n\n\n\n

On Nov. 9, the Treasury had the worst auction of 30-year Treasurys in more than a decade as investors demanded a premium to buy the bond. Demand was down by almost 5 percent from the month before.<\/p>\n\n\n\n

On Nov. 10, Moody’s, another rating firm, lowered the U.S. debt outlook to \u201cnegative\u201d from \u201cstable,\u201d arguing that polarization in Congress is likely to thwart fiscal reforms.<\/p>\n\n\n\n

\u201cPeople are increasingly realizing today [that U.S. Treasurys] aren\u2019t safe at all,\u201d Mr. Antoni said.<\/p>\n\n\n\n

He pointed out that \u201cviolent changes\u201d in monetary policy can dramatically affect bond prices.<\/p>\n\n\n\n

Nobody would pay the full price of a bond that pays 2 percent annual interest when the Treasury now offers plenty of bonds that pay 5 percent.<\/p>\n\n\n\n

\"
Traders work on the floor of the New York Stock Exchange in New York City on Nov. 15, 2023. (Spencer Platt\/Getty Images)<\/figcaption><\/figure>\n\n\n\n

\u201cIf you bought a government bond, for example, in 2020, it\u2019s lost about half of its value, so you just can\u2019t sell it,” Mr. Antoni said. “You\u2019re essentially stuck with that low rate of return.”<\/p>\n\n\n\n

Accounting for inflation, the older bonds are now, in fact, losing their owners money, but at least they return something.<\/p>\n\n\n\n

\u201cThat\u2019s still typically better than the losses you would take if you sold it outright,\u201d he said.<\/p>\n\n\n\n

Then, there\u2019s the default risk. Investors are aware that the government will likely one day be unable to pay its debts. So far, that hasn\u2019t been much of an issue, partly because of the \u201cgreater fool strategy,\u201d as he put it.<\/p>\n\n\n\n

\u201c’I\u2019m betting that there\u2019s a bigger fool out there who, after I want to sell, is still willing to buy, even though that Doomsday, if you will, is right around the corner,’\u201d he said, summing up the strategy.<\/p>\n\n\n\n

\u201cThat may sound silly, but there are plenty of investors and investments that operate on that principle.\u201d<\/p>\n\n\n\n

\"
Federal Reserve Chairman Jerome Powell prepares to deliver remarks in Washington on Nov. 8, 2023. Even if the Fed cuts rates, it may not solve the problem, economists say. (Chip Somodevilla\/Getty Images)<\/figcaption><\/figure>\n\n\n\n

The cooling of demand for the 30-year bonds may be a sign that investors are gradually losing confidence that such a fool will be available over the long haul. The Treasury seems to be responding by offering more of the shorter maturity bonds, according to Mr. Antoni.<\/p>\n\n\n\n

Yet inflation poses a similar risk to a default, he said, noting that the dollar has lost about 17 percent of its value over the past few years.<\/p>\n\n\n\n

\u201cIt\u2019s the same as if the Treasury were to turn around and only pay 83 percent of the bondholders and tell the other 17 percent to go pound sand,\u201d he said.<\/p>\n\n\n\n

All these factors seem to be souring investor confidence in the bonds. And once spoiled, investor trust is hard to restore, according to Mr. Hanke.<\/p>\n\n\n\n

\"<\/a><\/figure>\n\n\n\n

Even if the Fed were to cut rates again, it may not necessarily solve the problem, he said.<\/p>\n\n\n\n

\u201cIt looks like the bond market has turned into a bear market,” Mr. Hanke said. “And bond bear markets (as well as bull markets) last for many years. That implies that interest rates will be higher for longer\u2014a lot longer. If that is the case, it suggests that financing the federal deficit will be a significant problem for many years.\u201d<\/p>\n\n\n\n

Debt and War<\/h2>\n\n\n\n

Geopolitical interests have seemingly turned against the government bond market too, particularly with China exiting its massive position in U.S. Treasurys.<\/p>\n\n\n\n

\u201cAt this point, it\u2019s becoming not just a financial issue, but a national security issue,\u201d Mr. Antoni said.<\/p>\n\n\n\n

At the current pace, China could be U.S. debt-free in a few years, in what he expects to be a preparation for war.<\/p>\n\n\n\n

\"
US Treasury Secretary Janet Yellen waits to meet China’s Vice Premier He Lifeng at the start of the second day of their two-day meeting ahead of the Asia-Pacific Economic Cooperation (APEC), in San Francisco, California, on November 10, 2023. (LOREN ELLIOTT\/AFP via Getty Images)<\/figcaption><\/figure>\n\n\n\n

\u201cIt effectively isolates you from the Treasury\u2019s ability to selectively default,\u201d Mr. Antoni said, referring to the government\u2019s canceling of its debt held by another country as a form of economic sanction.<\/p>\n\n\n\n

\u201cIf we borrowed a bunch of money from China and then China turns around and invades Taiwan, we can say, \u2018You know what, all of our debt that China owns\u2014it\u2019s now voided. We\u2019re not going to pay that money back,\u2019\u201d he said.<\/p>\n\n\n\n

Such a step could have been used against Russia upon its invasion of Ukraine, \u201cexcept that Russia already sold off all their holdings of U.S. debt,\u201d Mr. Antoni noted.<\/p>\n\n\n\n

\u201cSo I think it\u2019s reasonable to believe that China getting rid of all its U.S. debt could be a prelude to war,\u201d he said.<\/p>\n\n\n\n

Fortunately for the United States, China isn\u2019t trying to flood the market with its stash of U.S. Treasurys, but mostly letting them expire and not buying more. The likely reason is that it bought the bonds at times of low interest and would have to sell them much cheaper now, Mr. Antoni said.<\/p>\n\n\n\n

\"
A cargo ship sails in the Taiwan Strait as tourists watch from a lighthouse on Pingtan Island, the closest point in China to Taiwan, in southeast China’s Fujian Province on April 16, 2023. (GREG BAKER\/AFP via Getty Images)<\/figcaption><\/figure>\n\n\n\n

Who\u2019s to Blame?<\/h2>\n\n\n\n

It would seem most obvious to blame excessive government debt on the government, particularly Congress. But the economists put much of the blame on the Fed.<\/p>\n\n\n\n

It\u2019s true that lawmakers are responsible for approving the budget and, regardless of party, have long failed to balance it. But it\u2019s the Fed that has made borrowing so expedient by setting interest rates extremely low for much of the past two decades.<\/p>\n\n\n\n

\u201c[Before that,] for many years, the debt did not grow as much because it would have been prohibitively expensive to grow it,\u201d Mr. Antoni said.<\/p>\n\n\n\n

Mr. Hanke said, \u201cThe Fed should be blamed for allowing the money supply to expand at an excessive rate.<\/p>\n\n\n\n

\u201cInflation is always and everywhere a monetary phenomenon. And, as night follows day, interest rates follow the course of inflation. So the Fed, by not paying attention to the rate of growth in the money supply, is a culprit.\u201d<\/p>\n\n\n\n

The Fed\u2019s buying up of government debt during the gargantuan pandemic spending set off the inflation avalanche and continued well into 2022, even after the pandemic effectively ended.<\/p>\n\n\n\n

\u201cExhibit 1 is ironically titled the \u2018Inflation Reduction Act,\u2019 an act that is filled with government subsidies and giveaways,\u201d Mr. Hanke said.<\/p>\n\n\n\n

\"
President Joe Biden (C), flanked by lawmakers, smiles after signing the Inflation Reduction Act of 2022, in the White House in Washington on Aug. 16, 2022. (MANDEL NGAN\/AFP via Getty Images<\/figcaption><\/figure>\n\n\n\n

The initial round of COVID-19 spending in 2020 didn\u2019t cause much inflation because the Fed spent the two prior years slightly tightening the money supply, according to Mr. Antoni.<\/p>\n\n\n\n

\u201cYou had an economy that was growing quickly, and you had money supply that was shrinking, both of which are very deflationary,” he said. “So as a result of that, there was a lot of cushion, if you will, built into the economy to absorb all of that excess spending in 2020. Inflation takes off in 2021 because that cushion is no longer there. So anything else was just fuel on the fire.\u201d<\/p>\n\n\n\n

He has no confidence that the Fed will keep rates high long enough to put the inflation boogeyman back in the closet.<\/p>\n\n\n\n

\"
People carry food donated by volunteers from the Baltimore Hunger Project outside of Padonia International Elementary school in Cockeysville, Md., on Dec. 4, 2020. (OLIVIER DOULIERY\/AFP via Getty Images)<\/figcaption><\/figure>\n\n\n\n

\u201cWe\u2019re still not back to pre-pandemic levels of price increases and people just have no confidence that the Fed is going to get us there,\u201d he said.<\/p>\n\n\n\n

Mr. Thornton argued that \u201cthe Fed has very little prospects of doing anything that wouldn\u2019t cause secondary problems.\u201d<\/p>\n\n\n\n

\"<\/a><\/figure>\n\n\n\n

\u201cThe Fed has backed itself into a corner. It\u2019s been extremely accommodative over the years. Its effort at quantitative tightening, in the sense of selling off government debt and mortgage-backed securities, has been really minuscule in the larger picture of things. Graphically, the Fed\u2019s balance sheet exploded upwards and it\u2019s just barely leveled off and moved down at all,\u201d he said.<\/p>\n\n\n\n

What to Do?<\/h2>\n\n\n\n

If the Fed isn\u2019t up to solving the problem, it will be up to Congress to step in. However, it’ll take a \u201ctremendous jolt\u201d to move the needle, according to Mr. Thornton.<\/p>\n\n\n\n

\u201cIt really needs to be across-the-board spending cuts that capture the attention of investors, business leaders, entrepreneurs, workers,\u201d he said.<\/p>\n\n\n\n

However, it need not necessarily be complex.<\/p>\n\n\n\n

\"
The New York Stock Exchange and the ‘Fearless Girl’ statue are seen on Wall Street in New York City on March 23, 2021. (ANGELA WEISS\/AFP via Getty Images)<\/figcaption><\/figure>\n\n\n\n

\u201cAll you have to do is just reset every budget, every government benefit, every government paycheck back to, say, 2018 levels,\u201d Mr. Thorton said.<\/p>\n\n\n\n

\u201cThat would solve the problem. It would solve the fiscal problem, it would solve the psychological problem that people are having about the U.S. economy.\u201d<\/p>\n\n\n\n

Such cuts would be inevitably called \u201cdraconian\u201d in the media and would need to be large enough to \u201cupset\u201d government workers as well as beneficiaries of government programs, he noted, suggesting a major political sacrifice.<\/p>\n\n\n\n

At the same time, the government would have to take steps to reinvigorate the economy by cutting taxes and barriers to business, he said.<\/p>\n\n\n\n

Mr. Thorton pointed to Alabama\u2019s new rule that frees overtime work from state income tax.<\/p>\n\n\n\n

\u201cThat\u2019s the type of thing we need to be doing on a much larger scale and we need to be doing it nationally,\u201d he said.<\/p>\n\n\n\n

\u201cHopefully, you\u2019ll see politicians responding with at least some efforts in the right directions, but they\u2019re going to have to really make some significant progress and very quickly and I would not bet right now that they\u2019re going to do enough.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

The expense to service this debt is staggering, and even if you’re a responsible person that doesn’t carry credit card debt having to pay interest, a sizeable chunk of your tax dollars are in effect paying interest for the nation’s credit card in the hands of our feckless leadership. https:\/\/www.theepochtimes.com\/article\/americas-runaway-debt-scenario-1000000000000-in-interest-5531738?utm_source=partner&utm_campaign=TheLibertyDaily&src_src=partner&src_cmp=TheLibertyDaily America’s debt spiral could devolve […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-5697","post","type-post","status-publish","format-standard","hentry","category-world"],"blocksy_meta":[],"featured_image_src":null,"author_info":{"display_name":"Jason","author_link":"https:\/\/jasonsblog.ddns.net\/index.php\/author\/jturning\/"},"_links":{"self":[{"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/posts\/5697","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/comments?post=5697"}],"version-history":[{"count":1,"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/posts\/5697\/revisions"}],"predecessor-version":[{"id":5698,"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/posts\/5697\/revisions\/5698"}],"wp:attachment":[{"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/media?parent=5697"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/categories?post=5697"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonsblog.ddns.net\/index.php\/wp-json\/wp\/v2\/tags?post=5697"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}