Rather than discuss the issue, I’m just going to show you four graphs. First, the 10 Year Treasury bond interest rate over the period of the last 50 years:
The federal debt:
The federal debt as a percent of GDP:
Note that doesn’t include the last two quarters. The interest rate has almost doubled since then (see the first chart). And spending on net interest:
I’ll add one small piece of analysis. It is an observed fact that debt overhang impedes economic growth and the causality goes in that direction (not the other way around). Translation: the situation is very different from what it was ten years or 20 years or 50 years ago. The present large debt overhang will make it very difficult for us to grow our way out of this problem.
I don’t care that Republicans don’t seem to care about this unless they have a Congressional majority and there’s a Democrat in the White House. That doesn’t matter unless you have a plan for 1) holding the federal debt constant; 2) holding the federal budget constant; 3) nearly trebling the amount of interest paid. If your plan is to borrow to cover the additional interest, it’s a lousy plan. If your plan is to raise taxes, tell me how you’ll do it and how you’ll raise enough revenue. If your plan is to cut spending, tell me how you’ll do it and what you plan to cut.
If your plan is to increase taxes and cut spending, keep Joschka Fischer’s advice in mind: the problem is not in knowing what to do but in how you’ll keep your job if you do it.
One caveat: don’t blame me. We’ve been doing nearly the opposite of what I’ve been saying to do over the period of the last 60 years.
Echoing Sherlock Holmes.
“When you have eliminated the impossible, whatever remains, however improbable, is the only plan left”.
The Federal Government isn’t cutting spending, it won’t be able to raise taxes enough, and borrowing at “high interest rates” to rollover debt may trigger a crisis; there is one option left, inflate the debt down to “manageable” levels.
The solution has the attraction it doesn’t require any votes in Congress,
just a compliant Federal Reserve board.
A mathematical exercise says if inflation is 6% while the Federal Deficit is 3% of GDP for 7 years, the debt to GDP ratio goes back to about 100% which is where it was 2014-2019.
By the way, I don’t know how the Congressional Budget Office projects net interest on the debt at $446 billion in 2031. If the debt just stays at its current level (which is implausible), $446 billion / $32 trillion implies 1.4% interest on the debt. As shown in the first graph, the issued rate for 10 year treasuries was only that low during the pandemic. Unless the Federal Reserve is going to do a 180 on reining in inflation I don’t see how treasuries will average 1.4% from 2023 to 2031 (when the vast majority of debt will rollover). Perhaps this is a sign about the only option left….
One last nit: net interest on the debt shouldn’t be compared to other “discretionary spending”. It should be compared to “mandatory spending” (i.e. social security and medicare).
That’s a very good point. Thank you.
“Inflating the debt to ‘manageable’ level” will impoverish millions and push millions more into desperation while leaving a relative handful of powerful, influential people unscathed. Of such things are revolutions made.
I have similar views on the consequences of inflation (except the part on revolutions).
History is on my side that its the course the Federal Government will take. Every time the Federal Government reached debt to GDP levels as now or had an abrupt spike in the debt to GDP ratio due to war or pandemic (like in 2020-2021; there was a period of years afterwards with very high inflation. This includes the Revolutionary War, the Civil War, WW1, and WW2.
But there was no revolution during those periods; (caveat that they all followed major wars).
There are some basic differences between our present situation and the past among them that debt to GDP is at the highest rate ever, capital is more portable than ever, and we have serious competition in the form of China. IMO deliberate inflation is a very big risk.
I agree with you to the extent that I think that Congress, the president, and the Federal Reserve all overestimate their own capabilities.
Debt to GDP got to 121.2% in 1946. It is 120.23% now. So not the highest ever. I agree the situations are different in some ways, the largest is in 1946 the US was the biggest exporter, now it is biggest importer. Debt’s ill effects work differently on exporters vs importers.
From 1946 to 1952; inflation spiked in two waves, at 14.4% in 1947 and 7.9% in 1951. Those were the years when the Federal Reserve and Treasury fought bitterly over Federal Reserve being forced to cap treasury interest rates at 2.5% until the Treasury Federal Reserve accord of 1951.
I have believed for years that when the Federal government reached its debt capacity (that’s the term of art you are looking for) it would inflate its way out.
I find the notion of revolutions overblown. The nation has willingly tolerated curtailment of civil liberties, lower real wages and declining real capital value the last few years.
Look at our press, the supposed watchdog, and their reporting on this. Look at voting patterns. Free beer politics is still sufficient to avoid revolutions.
The difference between now and 1946 is stark. World War II was existential but transient. Now debt increasing faster than GDP is a way of life. There are no signs it is anything but permanent. I really don’t believe we can borrow our way to prosperity. It’s a positive feedback loop.
Its not just the last few years, it has been at least 40. Prior to Reagan we made some attempts to keep a handle on debt. With Reagan we learned that “deficits dont matter” and saw a huge increase in debt. We saw some attempt to not run it up under Clinton but since then Large increases by Bush 2, Obama and Trump. Even when the economy was performing well, like it was with Trump for a short while we ignored it.
I think we are playing chicken. It will take some crisis to address it.
Steve
I largely agree with Curious about inflation. I don’t really see any other realistic options, given our political dysfunction. But I also don’t see the Fed pursuing that willingly.
I predict things will come to a head when the SS trust fund runs out. At that time, interest payments will also likely be very high. Congress will have to do something at that point and there won’t be any good or popular options.
A major difference from the WWII debt is that most of the debt back then was held by Americans, including ordinary Americans, who purchased bonds to help fund the war. These were then cashed out over time, which reduced the debt and gave people capital to spend and/or invest in other ways.
That’s why I’ve been saying that the next trustees’ report will be interesting. I suspect the trust fund will be exhausted sooner than many think, likely during the next presidential term.
I think the difference between post-WW2 and recent history is mostly that we just didnt keep running it up ahead of GDP growth. We might run deficits but they were less than our growth so debt as a percentage of GDP continued to drop. Then we ran into Reagan and it has never been the same. Politicians figured out that if you make it look like you are giving people free stuff you can win elections, especially the GOP.
Steve