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.

Irresponsible Fiscal Management in Washington - The Worsening Debt and Deficit

With Russiagate and the Kavanagh confirmation hearings consuming all of the mainstream media's "bandwidth", there is one very important aspect of Washington that is getting a pass from the media.  

With Donald Trump having promised to "drain the swamp" and with the Republicans supposedly being the party of fiscal prudence, the latest press release from the United States Treasury Department should cause American taxpayers to question whether anything has really changed in Washington.

During and just after the Great Recession took hold of the United States economy, there was great concern about Washington's growing debt and deficit problems.  As you can see on this graph from FRED, just after the beginning of the Great Recession in December 2007, the growth rate of the federal debt accelerated markedly:

Just in case you were curious, here is the current debt-to-the penny:

Here is a graph showing a history of the federal surplus/deficit:

As you can see, after growing to $1.413 trillion in fiscal 2009 and hitting $1.294 trillion in fiscal 2010 and $1.299 trillion in fiscal 2011, the federal deficit declined to a post-Great Recession low of $438.5 billion in fiscal 2014.  Since then, the deficit has started growing again, hitting $665.4 billion in fiscal 2017 indicating that Washington is, once again, showing its true fiscal abilities.

The most recent Monthly Treasury Statement from the Treasury Department for the month ending August 31, 2018 shows that little has changed under the new guard:

During one month alone, Washington had total outlays of $433 billion against total receipts of $219 billion leaving a shortfall of $214 billion or roughly one-third of the total deficit in fiscal 2017.

Let's look at the fiscal picture for the first 10 months of fiscal year 2018:

Outlays totalled $3.883 trillion against total receipts of $2.985 trillion leaving a shortfall of $898 billion, a deficit that is now 35 percent higher than the deficit in fiscal 2017.

Here is a table showing a summary of receipts, outlays and surpluses/deficits for fiscal years 2017 and 2018:

Both the spending of $433.3 billion and the deficit of $214.15 billion are the highest monthly totals in the last two fiscal years as shown on this graphic: 

In fact, when it comes to federal outlays, August's total sets a new record as shown on this graphic from FRED:

The only saving grace that Washington currently has is low interest rates on its debt as shown here and here:

Despite low interest rates, since the beginning of fiscal year 2018, Washington has paid out $332 billion on its current debt, an amount that consumed most of the federal government's income from corporate income taxes, duties and taxes other than individual taxes and Social Security and other payroll taxes which totalled $393 billion.

As we can see, little has changed when it comes to Washington's spending habits.  It seems that no matter which party holds the reins of power, irresponsible fiscal management is the order of the day with the federal government, an issue that is likely to become worse with the impending tax cuts. 

An Interesting Look at the Interest on the U.S. Debt

Updated to July 18th, 2011

I apologize in advance for the second depressing posting in a row but I thought I'd get this posted now since the subject is linked to my last article.

In looking through this document from the Congressional Budget Office last week, I found this particularly frightening line:

"Interest payments, which absorb federal resources that could otherwise be used to pay for government services, currently amount to more than 1 percent of GDP; under this scenario, they would rise to 4 percent of GDP (or one-sixth of federal revenues) by 2035."

Needless to say, it caught my eye.  I thought that it was well worth looking into a bit deeper.

The document in question is a report entitled "The Long-Term Budget Outlook" dated June 2010 and revised August 2010.  It is a cornucopia of interesting very long term fiscal projections by the Congressional Budget Office.

The scenario of which the CBO speaks is one that they term the "extended-baseline scenario".  In this scenario, long-term tax increases would take place in lockstep with economic growth, the tax cuts of 2001 and 2003 would expire and overall total government revenue would rise to 23 percent of GDP by 2035 (and increase thereafter), a much higher rate than the norm seen in recent decades.  On the spending side, government spending on everything other than mandatory health care programs, Social Security and interest on the federal debt would decline to the lowest percentage of GDP since before World War II.  Yup, that's going to happen.  This would mean cuts in just about all domestic programs including national defence.  To summarize, in this out-of-this-world scenario, the CBO hopes that the increase in revenue and decrease in most domestic program spending will offset MOST of the rise in spending on health care and Social Security necessitated by the baby boomers moving into their senior (and more expensive) years. 

If this "Alice In Wonderland" scenario takes place, than and only then will federal debt held by the public grow from 62 percent of GDP this year to 80 percent of GDP by 2035.  Then, and only then, will interest payments only rise to 4 percent of GDP as noted above.

Three letters: OMG.  Basically the CBO, in its wildest dream state, can only fudge the revenue and expenditure numbers enough to keep our interest payments down to one-sixth of federal revenues by 2035. 

Just in case you thought that the extended-baseline scenario wasn't the stuff made of nightmares, here's the CBO's other scenario.  This scenario has the rather innocuous-sounding moniker "alternative fiscal scenario".  It doesn't sound that bad, does it?  Certainly, it couldn't be any worse than having a root canal, could it? Under the alternative fiscal scenario, the CBO assumes that Medicare payment rates for physicians would gradually increase (they won't under current legislation) and that several policies enacted recently that would restrain growth in health care expenditures will not continue after 2020.  Once again, as seen in the extended-baseline scenario, spending on other activities other than mandatory health care programs, Social Security and interest on the federal debt would fall below the average level of the past 40 years relative to GDP but not as low as under the extended-baseline scenario.  The CBO also assumed that most of the provisions of the 2001 and 2003 tax cuts would be extended, among other things, which would keep tax revenues near their historical average of 19 percent of GDP.  Should the CBO's worst-case (and probably most likely) scenario unfold, interest payments would rise to 9 percent of GDP or roughly one-third of revenues by 2035 and much more in later years because of ballooning debt.  While not used in the CBO scenarios, they state that as the debt rose, upward pressure on interest rates would be exerted making interest outlays even larger.

Let's take a graphical look at the two budget scenarios noting that the top chart is the best case scenario and the second chart is the one that we don't want to think about:

Lest we forget, as noted previously, the aging baby boomers are going to put a really bad crimp into the best laid plans of government.  Those of us that are boomers are already using more of the social network (i.e. health care) that our government supplies than we did a decade or two ago and, looking at the lives of our parents, we are likely to use more of the goodies that our government provides as the next decades pass.  Here's a little graph from the CBO showing just that:

Notice that pretty, little dark blue wedge "Effect of Aging" and how it adds about 4 percent of GDP to the cost of supplying health care and Social Security by 2035?  Can you imagine how wide that wedge will be by 2050 when the youngest of the baby boomers are in their mid-80s?

The CBO, as noted earlier in this posting, mentions briefly that the massive accrual of federal debt could have an upward impact on interest rates.  Let's take a look at the impact of rising interest rates on the entire scenario.  A study entitled "Projected Interest Payments on Federal Debt Balloon" by Veronique de Rugy a Senior Research Fellow at George Mason University, linked here, has a most interesting chart which shows the projected interest payments to the year 2084 from the CBO's alternative fiscal scenario as noted above.  In their analysis, the CBO assumes constant long-term interest rates at just below 5 percent.  In Ms. de Rugy's research, she uses the same budgetary data but changes the interest rate.  At an interest rate of 6 percent, the interest cost of the debt reaches 59.8 percent of GDP by the year 2084.  If the interest rate rises to 7 percent, the interest on the projected debt reaches 136 percent of GDP in 2084.  

Three more letters and two exclamation marks:  OMG!!

Back to the CBO report.  Here's a look at the debt situation as a percentage of GDP under the two scenarios:

Enough said.

Here is Congressional Budget Office's summary of the issues facing government from their report:

"Keeping deficits and debt from growing to unsustainable levels would require raising revenues as a percentage of GDP significantly above past levels, reducing outlays sharply relative to CBO’s projections, or some combina- tion of those approaches. Making such changes while economic activity and employment remain well below their potential levels would probably slow the economic recovery. However, the sooner that long-term changes to spending and revenues are agreed on, and the sooner they are carried out once the economic weakness ends, the smaller will be the damage to the economy from growing federal debt. Earlier action would require more sacrifices by earlier generations to benefit future generations, but it would also permit smaller or more gradual changes and would give people more time to adjust to them." (my bold)

President Obama, Senators and Congressmen/Congresswomen (and anyone else in government from any other country who cares): the horse has already left the barn.  It's likely already far too late to shut the door.

By the way, the interest on the debt for the first nine months of fiscal 2011 is $385,871,949,498.62. The interest owing for the first nine months of this year has already reached 93 percent of the interest owing for all of fiscal 2010 with over $110 billion owing for the month of June 2011 alone. 

Heaven help us if interest rates ever go back up to historical norms!

References:

Congressional Budget Office - The Long-Term Budget Outlook - June 2010 (Revised August 2010)