America Is Trapped in a Fiscal Straightjacket, as Federal Debt Balloons and Interest Rates Soar

Congress and the Biden administration seem unaware that rising interest rates are about as “transitory” as they told us inflation would be — meaning, likely to be around for quite a while. Why does this matter? Ask someone who’s been enticed by a mortgage with a variable interest rate that starts low and then rises quickly when conditions change.Over the past month, yields on ten-year notes have risen sharply to 4.8 percent, well above the prevailing rate over the past 16 years. Meanwhile, two-year Treasuries are paying a 5.2 percent yield, and three-month Treasury bills are paying 5.5 percent — much higher than the rates projected by the Congressional Budget Office in February. For this quarter, CBO assumed a ten-year yield of 3.9 percent; it’s currently 4.7 percent.Interest-rate increases might not worry those who have locked in low rates on their mortgages or car loans or who have wisely invested in government bonds. Yet the hikes will be painful for the federal government, which has done a lot of short-term borrowing.Most households have been smart to protect themselves from fluctuating interest rates. The Wall Street Journal reported in July that, according to Moody’s analytics, “only 11 percent of outstanding household debt carried rates that fluctuated with benchmark interest rates.” Americans learned the risk of variable rates during the last recession. The government didn’t.The latest Treasury data show that the average maturity of U.S. government debt is only 73 months. One-third of this debt has a maturity of a year or less, and 53 percent has a maturity of three years or less. That means that half must be rolled over on a very short-term basis — meaning paid back and borrowed once again — only to face higher rates. That’s a big deal considering our growing $25.8 trillion debt.If you follow such things, you know that as rates rise, the cost of servicing the debt swells. The CBO’s Monthly Budget Review highlights the problem’s scale. It estimates paying $711 billion in net interest this fiscal year. If you add to this the Federal Reserve’s FY2023 operating losses of $100 billion — as the Joint Economic Committee chief economist, Chris Russo, suggests we should — you get around $810 billion. That’s 3.1 percent of America’s GDP, more than double the interest payments for the previous year.On average, current rates are about one percentage point above those assumed in the CBO’s baseline. Yet what if that gap were to continue over the next ten years? In that case, debt would grow by an additional $2.8 trillion, on top of the $45.2 trillion the government will have accumulated by 2033.Now, if higher debt with no real repayment plan has no other economic consequences than slower growth, greater risk of financial crisis and less ability to respond to emergencies — all of which are bad enough on their own — then CBO projects that net interest will consume 23 percent of spending and roughly 40 percent of federal revenue by 2053.Think hard about that.What if interest payments alone — not including principal, tax, or insurance — on your house, car, and credit card made up 40 percent of your wages and a quarter of your spending? Forget about vacations and restaurants and maybe even adequate housing, food, and health care.This scenario paints a picture of a government caught in a fiscal straitjacket. Now, imagine the hard choices our government will need to make between, for example, defense and social welfare.Yet the reality is even more brutal. Academic studies find that each percentage-point increase in the debt-to-GDP ratio raises the real interest rate. In other words, higher rates lead to more debt, and more debt begets higher rates, and on and on. Further, it’s utterly unrealistic to project that an increase in the debt to 181 percent from 97 percent of America’s GDP will not fuel higher inflation.Today, inflation has fallen but remains uncomfortably above the Fed’s 2 percent target, and it’s premature to declare victory. Indeed, if those rising interest payments are paid with more borrowing as opposed to spending cuts or tax hikes, as is projected by CBO, it risks inflation again accelerating. That would require more rate hikes, and it would launch us on a nasty path resembling the 1970s and 1980s. The difference is that back then, the debt was only 25 percent of GDP.Get the picture? If Congress continues to refuse to cut spending, we could be in for even more serious pain than we’re suffering today.Creators.com

America Is Trapped in a Fiscal Straightjacket, as Federal Debt Balloons and Interest Rates Soar

More from the New York Sun

Will Europe and the Rest of the World Listen to Marco Rubio?

Jesse Jackson’s ‘Unfinished Business’

Mamdani, in $127 Billion Budget, Puts New York City Taxpayers on the Spot in Bid To Boost Revenues

More from the New York Sun

Will Europe and the Rest of the World Listen to Marco Rubio?

Jesse Jackson’s ‘Unfinished Business’

Mamdani, in $127 Billion Budget, Puts New York City Taxpayers on the Spot in Bid To Boost Revenues

A New Documentary Showcases Billy Preston’s Musical Contribution to The Fab Four

Mamdani Threatens To Hike Property Taxes If Albany Refuses To Raise Income Taxes on Corporations and the ‘Ultrawealthy’

Transgender Cult Leader Leans on Landmark Supreme Court Second Amendment Decision for Defense

Fani Willis Refuses To Obey New Law and Pay Trump’s ‘Preposterous’ Legal Fees, Citing Bills for ‘Seafood Lunches,’ Luxury Hotels

As Iran Threatens Retaliation If America Strikes, Watch the Proxies