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The Federal Debt Spiral

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Death-spiral — The downward, corkscrew-motion of a disabled aircraft which is unrecoverably headed for a crash.

The US federal government may well be in a death spiral  – or perhaps we should call it a debt-spiral. 

I was looking back over the posts for this week and noticed something significant. The headline for our second post on Oct. 3 reads, “Federal Government Runs Up Sixth-Largest Single-Year Debt Increase in US History” On Oct 4, the very next post, the headline reads, US Treasury Yields Hit Seven-Year High; Rising Interest Rates Could Be Bad News in Debt-Ridden Economy. When you put these two stories together, it spells bad news for the United States.

The federal government is falling into a debt-spiral it’s going to have a hard time getting out of.

In the first place, the government can’t seem to get its spending under control. In August, the US government set a single month spending record, burning through $433.3 billion and running up a monthly deficit of $214 billion. Federal government spending came in 30% higher than August 2017, ranking as the highest monthly outlay on record. And the spending pace looks to continue. Pres. Trump recently signed an $853 billion spending bill.

Meanwhile, interest rates are rising. This is partly a function of intentional Federal Reserve tightening and partly a function of normal supply and demand. Earlier this year, the US Treasury Department said it planned to auction off around $1.4 trillion in Treasuries in 2018 alone. And it won’t end there. The department expects that pace of borrowing to continue over the next several years. That’s a lot of bonds dumped into the marketplace at a time when the traditional buyers – China, Japan and the Federal Reserve – aren’t buying. In fact, both the Chinese and Japanese have been selling US debt.

Obviously, rising interest rates aren’t good news when you’re trying to finance increasing levels of debt. Growing debt coupled with soaring interest payments creates a vicious upwardly spiraling cycle. As debt grows, it costs more money to service it. That requires more borrowing, which adds to the debt, which increases the interest payments — and on and on it goes.

The government spent $32 billion just servicing its current debt in August. Annual interest payments are approaching $500 billion. Every uptick in the interest rate ups that number. 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. Which way the Fed plays this remains to be seen.

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