The Red Line: Biden’s Out-of-Control Spending Means Uncle Sam Is Headed for a Financial Train Wreck

Interest obligations are now running double the $351 billion paid out just two years ago.

AP/William J. Smith
The crash of a Pennsylvania Railroad passenger train that failed to stop at Union Station, Washington D.C., January 15, 1953. AP/William J. Smith

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. So, too, is what it foreshadows for 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, of course, 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. There is a significant risk that businesses and consumers will buckle under the burden. Recession and lower rates are distinctly possible, despite economic commentary to the contrary that sees, instead, a “soft landing” ahead. 

The heroic railroad engineer, Casey Jones.
The heroic railroad engineer, Casey Jones. Via Wikimedia Commons

The skyrocketing rise in interest costs has some of the fascination of a runaway freight. Yet, the more farsighted focus is instead on the damage to federal finances being wrought by the freight and on the risk of other related calamities, 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. All other things being equal, a $350 billion increase in interest expense implies an offsetting equal decrease in discretionary spending, reducing it by 20 percent.

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,  Xi Jinping, and Ayatollah Khamenei will be watching negotiations over the Pentagon budget.

Holding defense spending constant implies that the entire $350 reduction would hit discretionary domestic spending — meaning a stunning 40 percent 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 freight 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 addition, if recession hits, 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 entered 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. The commercial real estate sector is stressed. Many commercial real estate projects are financed with mortgages of shorter-terms than the 30-year term typical 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, these projects will have to be refinanced at much higher rates, rendering some uneconomic. Not all developer-owners will be able to support their newly unprofitable projects. Lenders will wind up taking back the 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 percent 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 percent and, thereafter, more than 20 percent.

The world’s major economies are all overloaded with debt. China has enormous debt problems, and the European Union is also debt-ridden. Debt problems overseas compound America’s debt problem. 

The U.S. must make painful adjustments now, starting with rolling back President Biden’s profligate spending, which has added about $5 trillion to the nation’s publicly held debt since his inauguration. His reckless spending has fueled inflation, jacked up interest rates and pushed the debt to a towering $26.1 trillion — the Biden express is hurtling out of control.

The New York Sun

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