Last September, the Congressional Budget Office (CBO) predicted the federal debt wouldn’t hit $29 trillion until at least 2028. Just short of a year later, the national debt now stands at $28.6 trillion and is set to surpass $29 trillion within only weeks.
Since Congress has not yet enacted all its new spending proposals, the CBO debt estimates do not yet include them. The $1.2 trillion “infrastructure” bill still must pass the House, and a $3.5 trillion budget Reconciliation Bill will add to the current debt amount. The proposed 2022 budget will likely be more than $6 trillion (up from $4.8 trillion in 2020).
Adding all this up, a $40 trillion federal debt is very possible within a couple of years. Estimates that the debt will reach $50 trillion by 2030 are not particularly remarkable given the current pace of government spending.
The CBO assumes that interest rates on the national debt won’t reach 2 percent until 2027, but this is a big assumption. If the interest rate rises by just 1 percent, that would create an additional $400 billion in annual payments on the national debt.
Interest Rates & Inflation Darken The Outlook
To finance that amount of debt, the U.S. Treasury has to sell bonds. Currently, the interest rate on ten-year U.S. Treasury bonds is just 1.29 percent. From 1990 to 2020, the rate averaged 4.4 percent. Over the 60 years from 1960 to 2020, it averaged 6.0 percent.
Even if we return to only the 4.4 percent rate, that would result in a massive increase in interest payments. A 3 percentage point increase would add $1.2 trillion to the annual deficit. Soon, we will find ourselves borrowing more just to pay the interest on the debt that we already owe.
Inflation has been on the rise, and interest rates have to at least be high enough to compensate bondholders for the dollar’s diminishing purchasing power. In June and July, consumer inflation averaged an annual rate of 8.4 percent. Over that same two months, the producer inflation rate, the cost to businesses, soared at an annual rate of 12.6 percent.
In fact, interest rates on bonds will have to outpace expected inflation for anyone to want to buy them. I will not lend you money if I expect the total you pay me back is worth less than what I originally gave you. The return has to be even more than inflation because bondholders also have to pay taxes on their interest income.
Increased Tax Rates Will Drive Up The Debt
President Biden’s proposed increases in individual and corporate income tax rates would create even greater increases in interest rates, thus adding even further to the dramatic debt increases that Biden and Democrats already have planned.
Our entire national income (GDP) now stands at $22.72 trillion. A few European countries have higher debt burdens relative to their GDP. Greece’s national debt is 107 percent greater than its GDP, and Italy’s is 55 percent greater. Few could disagree that both of those countries currently have debt crises. Our level of debt already exceeds our annual income amount by 26 percent.
Imagine if you had to borrow every month to pay the interest on your mortgage payment, and that you did so for many years. Loaning money like that would be a very risky proposition, and any such loan would come with high interest rates to compensate for the increased risk.
Countries can and do default on their debt. It happens. Argentina defaulted, but was cut off from international trade and foreign capital markets, plus faced seizure of its assets in other countries.
High Government Debt Causes More Inflation
Many heavily indebted countries try to solve their debt problem by increasing inflation. In theory, 50 percent inflation would reduce the value of the debt by 50 percent. But lenders are unlikely to simply be caught off guard, and new buyers won’t buy bonds unless they have a high enough interest to protect them against hints of such rampant inflation. And, of course, high inflation comes with its own dire economic consequences. Inflation may be considered a hidden tax.
The unique status of the Dollar as the world’s reserve currency would make such an inflationary escape particularly costly for the United States. In the face of higher inflation rates, foreigners would sell their dollars driving down the dollar’s value; and making it more costly for us to buy goods from other countries. Foreign-held dollars will also come back to the United States to increase the domestic money supply and causing additional inflation.
All this means more pain, a lot of pain. Given how quickly our debt is increasing, that pain isn’t only something distant future generations will experience. If we can’t stop our runaway national debt, we will face much greater economic sacrifices in the future: higher taxes & a dramatic reduction in our standard of living. For older people on the lookout for threats to their Social Security and Medicare benefits, this is it.✪