The United States Fiscal Position - A Crisis in the Making

If you want a sense of where Washington's next fiscal crisis will come from, look at this graphic with data from the Federal Reserve's FRED database:

 

In the third quarter of 2023, interest on the federal debt was consuming 45 percent of every tax dollar that individuals remitted to Washington.  While this is below the record set back in the 1980s and early 1990s, it is important to keep in mind that this is what interest rates looked like back then compared to today:

 

Here is a graphic from the Bureau of Economic Analysis showing how federal interest payments have grown since Q1 2021:

 

The non-partisan Congressional Budget Office shows the following increase in net interest outlays (in grey) to 2053 as a percentage of GDP:

 

Net interest outlays will rise from 2.5 percent of GDP in 2023 to 3.6 percent in 2033, 4.8 percent in 2043 and 6.7 percent in 2053, outstripping the growth in mandatory spending on both social security and major health care programs.

With Washington's total debt looking like this:

 

...and, to reiterate, it's pretty apparent that an unprecedented debt crisis is looming as interest owing on the federal debt rising at a record rate and nearly doubling since the third quarter of 2020:

 

Nations, particularly those who are members of the BRICS organization are increasingly divesting of the U.S. dollar which means that Washington will be forced to keep interest rates relatively high to attract investors to its increasingly unappealing currency, further increasing both the debt and interest payments on the debt.

 

Net interest outlays will rise from 2.5 percent of GDP in 2023 to 3.6 percent in 2033, 4.8 percent in 2043 and 6.7 percent in 2053, outstripping the growth in mandatory spending on both social security and major health care programs:

 

Here is a quote from the aforementioned Congressional Budget Office's latest report on American's fiscal situation with my bolds:

 

"Persistently large deficits would lead to substantial increases in federal debt. In CBO’s projections, federal debt held by the public, measured in relation to GDP, surpasses its highest level in history in 2029, reaching 107 percent. Debt continues to climb thereafter and reaches 181 percent of GDP at the end of 2053.

 

Such high and rising debt would have significant economic and financial consequences. It would, among other things, slow economic growth, drive up interest payments to foreign holders of U.S. debt, elevate the risk of a fiscal crisis, increase the likelihood of other adverse effects that could occur more gradually, and make the nation’s fiscal position more vulnerable to an increase in interest rates. In addition, it could cause lawmakers to feel more constrained in their policy choices."

 

According to the CBO, here are the consequences of high and rising federal debt:

"1.) Borrowing costs throughout the economy would rise, reducing private investment and slowing the growth of economic output.

2.) Rising interest costs associated with that debt would drive up interest payments to foreign holders of U.S. debt, decreasing the nation’s net international income.

3.) There would be an elevated risk of a fiscal crisis—that is, a situation in which investors lose confidence in the U.S. government’s ability to service and repay its debt, causing interest rates to increase abruptly, inflation to spiral upward, or other disruptions to occur.

4.) The likelihood of other adverse effects would also increase. For example, expectations of higher rates of inflation could become widespread, which could erode confidence in the U.S. dollar as the dominant international reserve currency.

5.) The United States’ fiscal position would be more vulnerable to an increase in interest rates, because 

the higher debt is, the more an increase in interest rates raises debt-service costs.

6.) Lawmakers might feel constrained in using fiscal policy to respond to unforeseen events or for other purposes, such as to promote economic activity or strengthen national defense."

 

If America's federal politicians continue to spend what they don't have and kick the "debt can" further and further down the road, America is screwed and the demise of the U.S. dollar is assured.  With Washington sabre-rattling at China, Russia, Iran and North Korea, one can be assured that cuts to spending are not going to happen and that outlays for defense are going to continue to rise in the future, putting further strain on the U.S. economy.