🔋Debt Pt 1: Debt Service

Increasing interest rates make life harder for the government as well. AKA, we know the future.

Feb 08, 2023

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Part - 2, 3, 4, 5

This is the first of a multi-part series relating to issues associated with our debt soaked world that we’ve been navigating the last ~50 years. Releases likely not all consecutive with the aim to explore a variety of topics.

A cartoon man in a suit chained to a debt time bomb and holding a credit card. — Motley Fool

We constantly hear about the rising debt and yet nothing ever comes of it. You may have also heard about congress debating over the debt ceiling recently and could have even stirred up some worry. Every once and a while the US has to raise the debt ceiling to continue funding the government because they spend more than they make in tax revenue and other income. This is largely used as an excuse for political negotiations, but the fact is both parties raise the debt ceiling and increase the national debt all the same. Regardless of party in power for the president, house, or senate the debt ceiling gets raised no matter what.

₿aseload 🍷 @Endorsen

@PeterSchiff Ha yes, the debt ceiling

Many even believe that the debt accumulated does not matter any more and doesn’t contribute to inflation. This is the view of a modern monetary theorist and some Keynesian economists. In a way they are right since the US has the reserve currency and the “printing press” and will always be able to pay its debt. The problem is that when public debt in a country gets too high they run into other problems such as productivity issues, inflation, and loss of credibility of the currency. This is generally the objection the Austrian school of economics has against these practices.

Countries in situations of inordinate amounts of debt (~ >100% debt/GDP) have only a few options left including financial austerity(politically unfavorable), default(common in emerging markets, impossible with money printer), and inflating the debt away(most likely route).

Tax receipts hit an all time high of $4.9 trillion in 2022 and if everything goes according to plan, $4.7 trillion in 2023. With the Federal Reserve continuing to increase interest rates, with plans to hold them at higher levels throughout 2023, this means that debt service costs will exceed 1 trillion dollars as the tweet below implies. Interest expense on debt has nearly surpassed the US defense budget already and most probably know that it is quite a large expenditure.

Wall Street Silver @WallStreetSilv

US Government Interest Payments 🔥🔥🔥 It is projected to rise to over $1.2 trillion per year in the next two years as more debt rolls over at the new higher rates. That is about 1/3 of all tax revenue. 😱

From today’s perspective, interest expense is unproductive capital going to “waste” on things we paid for with debt in the past. Instead of using the fresh tax receipts to pay for new government programs like the Infrastructure Bill and Inflation Reduction Act, more and more of tax revenue is being sucked toward debt interest payments from past spending. This is like buying a car last year and having payments to make on it, only you keep borrowing other peoples money to make the payments and the payments keep getting more expensive.

According to prominent macro analyst Luke Gromen, US tax receipts were in a bubble fed by the asset price bubble seen in everything from stocks, real estate, and crypto. As prices have already started rolling over, the tax receipts will as well(predicted to fall even by government projections). This gives the government less money to work with just as their expenses are going up. What does this mean practically for us? Well it means that its only a matter of time before something has to change because this is unsustainable. Since there’s little political will for budget cuts, the US (Federal Reserve) will have to pivot from their current projections and lower interest rates to move debt service payments lower again, and/or print the difference with fresh money supply (Treasury).

The “fed pivot” I refer to here is thus a ticking time bomb where no one knows exactly when it will go off. Things like bond market issues, a stock market crash, or emerging market financial crisis are all things that could set off this bomb. Stay alert, a fed cutting interest rates is generally not an immediately positive phenomena, as it is usually amidst some real economic challenges.

-Grayson

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