Debt and Taxes

Yesterday was tax day. We’d like to think the money we hand over to the IRS is paying for stuff – things like roads, education and national defense. But an increasing number of tax dollars are simply going to pay interest on the national debt. According to Committee for a Responsible Federal Budget president Maya MacGuineas, the average taxpayer forked over more than $2,000 this year just to cover their share of the interest on the national debt.

In other words, we’re not paying for stuff today. We’re paying for the spending of the past.

In an op-ed published by The Hill, MacGuineas and former Pensylvania Gov. Ed Rendell said interest payments on the debt rank as the fastest growing part of the federal budget. It will be bigger than Medicaid next year and larger than the military budget by 2025.

Even so, borrowing and spending show no signs of slowing. The federal government set an all-time record monthly deficit of $234 billion in February. The net interest payment that month alone was $25 billion. The annual interest expense for the federal government is approaching $500 billion. And it will continue to accelerate as each month’s deficit adds to a national debt already topping $22 trillion.

Despite the ever upward spiraling debt, there seems to be no urgency to address this issue in Washington D.C. The Hill article lists a litany of excuses used to sweep the problem under the rug.

• Tax cuts pay for themselves (they don’t)
• “My priority” is too important to worry about paying for it.
• Don’t worry we can just print more money
• The debt isn’t really important and we can deal with it down the road.

Wrap your head around this. At the current rate, within 50 years, the national debt will be twice as large as the entire US economy. This is using conservative numbers and assumes Congress doesn’t do anything to make the situation worse – probably not a safe assumption.

These spiraling interest payments are one of the reasons the Federal Reserve can’t let interest rates rise. Every uptick in the interest rate increases the government’s interest payment. At the current trajectory, the cost of paying the annual interest on the US debt will equal the annual cost of Social Security within 30 years.

Now, imagine where we’d be if we were actually in a “normal” interest rate environment. If the interest rate on Treasury debt stood at 6.2% – as it did in 2000 – the annual interest payment on the current debt would nearly triple to $1.3 trillion.

This is a debt-spiral.

John Rubino of DollarCollapse.com made an important observation about the trajectory of interest payments. They were held artificially low through the massive Obama spending spree thanks to the Fed’s low interest rate policy.

The decline in interest expense between 2007 and 2014 – while we were running trillion-dollar deficits – was due to the Fed lowering interest rates to levels not seen since the Great Depression. This seemingly free lunch led many in the political/Keynesian class to conclude that they’d discovered a perpetual motion machine: simply cut interest rates every year and borrowing is essentially free … The recent 25% spike in interest expense in just three years exceeds the percentage increase in government debt because interest rates rose concurrently. So the US is now being hit with a double-whammy of debt that’s both rising and becoming more costly. Now the real trouble begins. As the government’s short-term debt is refinanced at ever-higher interest rates, interest expense will rise even more steeply. Within three years at the current rate of borrowing, US federal debt will be $25 trillion. An average interest rate of 4% – below the historical norm and easily within reach if current trends continue – will produce an annual interest expense of $1 trillion. Interest will be the government’s largest single budget item, raising the deficit and adding to future debt increases. The perpetual motion machine will have shifted into reverse.”

When you get into a debt-spiral, rising interest expense begets higher deficits begets rising interest expense. As Rubino points out, once you’re in the spiral, there really isn’t a way out – only a choice of crises. Push rates down and risk a currency collapse or allow rates to continue rising and burst the bubble economy.

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