Within a year, interest on the national debt will consume 20% of tax revenue.
Annus Horribilis Third Quarter Update
Interest on the National Debt Set to Explode
By: George Noga – October 2, 2022
This post updates our forecast for this year, which we have dubbed an annus horribilis. Please read our prior posts of 1/1/22, 4/3/22, 5/15/22 and 7/10/22 in this series; they are easily available on our website: www.mllg.us. We also provide a truly horrifying update in our continuing coverage of America’s spending crisis.
On New Year’s Day we wrote this would be a year of geopolitical, economic, political and investment horrors; unfortunately, we were right. Looking ahead, we see stagflation, i.e. inflation combined with stagnation. Inflation cannot be brought under control until the federal funds rate exceeds the inflation rate. Today, inflation is 8.3% while the federal funds rate is 3.00% to 3.25%. You can do the math. Markets may not bottom out until well into 2023. However, if we are in the opening stage of the spending crisis, markets may not hit bottom for years. The worst is yet to come.
To the extent our present inflation is caused by excess spending (fiscal policy), it can be ended only via fiscal policy, i.e. revenue and spending brought into long-term balance. Simply jacking up interest rates to create a recession will not be enough.
Spending Crisis: High Interest Rates Devastate the Federal Budget
A long dormant, but intractable and devastating peril has reared its ugly head; interest on the national debt is poised to skyrocket. Interest on the debt for the 12 months ended May 31, 2022, was $670 billion. There are $3.7 trillion of Treasury bills and $2.4 trillion of Treasury notes maturing within one year. Interest rates on the new debt will be 3% higher, equal to $200 billion more in interest as these bills and notes are replaced. Our interest cost will be $870 billion (20% of revenue) within a year; this is more than we spend on defense ($746 billion) or Medicare ($700 billion).
In 2024 interest on the debt will hit $1 trillion – on its way to the moon.
Credit card companies frequently offer low, or even zero, “teaser” interest rates, after which the rates skyrocket. America has benefited from teaser rates for many years. But now the teaser rates have ended, and rates are surging higher and higher. This is akin to taking out a negative amortization adjustable-rate mortgage on the US economy.
We are experiencing a perfect fiscal storm. The stock market decline will reduce capital gains tax collections by $400 billion. As additional debt matures in coming years, higher interest rates will cost about $200 billion per year more – each year. The recession will further reduce tax revenue and create a huge deficit that balloons the debt. In 2024 interest on the debt will reach $1 trillion – on its way to the moon.
Who will be the last person in America to buy a US Treasury bond?
America is trapped in a vicious circle. Higher interest rates increase the cost of borrowing. Interest expense skyrockets, leading to more borrowing, leading to more interest – until the music stops. The US has been on an unsustainable fiscal path for a long time; we have sowed the wind and now we are about to reap the whirlwind.
The US is on a clear path for interest to consume 25% to 30% of all federal revenue within a few years. What will it take for people to quit buying US Treasury debt? Who will be the last person in America to buy a US Treasury bond?
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Watch for our uber-special Colombus Day posting next Sunday.
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More Liberty Less Government – mllg@cfl.rr.com – www.mllg.us
