Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

The Federal Debt Spiral

  by    0   0

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.

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

The Lurking Inflation Monster

Where’s the inflation? The Federal Reserve printed money for nearly a decade, and yet, inflation – as measured by the government – has been “muted.” What gives?

READ MORE →

Gold Set to Join the “All-Time Highs Club” — Bloomberg Intelligence

Gold is poised to join the “all-time-highs” club in the upcoming decade. No, this isn’t the musing of some gold-bug. It’s analysis from a pretty mainstream source — Bloomberg Intelligence. Stocks have set new records over the last several weeks and the dollar hit 2-year highs this fall. But writing in the commodity outlook, Bloomberg […]

READ MORE →

Recession Early Warning? Spending By the Wealthy Is Slowing

America’s economy is built on consumption. Average Americans have been pushing the US economy along, spending money they don’t have. But as we’ve reported, there are signals that the credit cards might be close to maxed out. Now there appears to be another warning sign – the wealthy are reining in their spending.

READ MORE →

Poland Brings Gold Home; Calls It a Symbol of Strength

Poland has repatriated 100 tons of gold from England. National Bank of Poland Governor Adam Glapiński announced the yellow metal’s return home on Monday. “The gold symbolizes the strength of the country,” Glapiński told reporters.

READ MORE →

Is the Auto Loan Bubble Nearing Its Popping Point?

a check engine light is onHow much more can the auto loan bubble blow up before it pops? Total auto loans and leases outstanding for new and used vehicles increased by another 4.3% year-on-year in the third quarter, according to the latest data from the Federal Reserve. This was a factor in pushing total American consumer debt to a new […]

READ MORE →

Comments are closed.

Call Now