Beware of the Federal Government’s Debt Spiral

In aviation, a death-spiral describes the downward, corkscrew-motion of a disabled aircraft that’s unrecoverably headed for a crash. If you pilot an aircraft, you never want to find yourself in a death-spiral — for obvious reasons. Well, The federal government may well be in a death spiral of its own  – or perhaps we should call it a debt-spiral. 

Two primary factors drive this looming disaster.

In the first place, the government can’t seem to get its spending under control. In August, the federal 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 percent 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.

Of course, the vast majority of this spending funds unconstitutional federal agencies, programs and wars.

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 U.S. Treasury Department said it planned to auction off around $1.4 trillion in bonds 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. That’s $500 billion just to pay interest on the debt every year. And every uptick in the interest rate ups that number. At the current trajectory, the cost of paying the annual interest on the U.S. 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.

There you have the 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 in the wake of the 2008 crash. Pres. Trump will get no such monetary policy benefit as he continues Obama’s big-spending ways.

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 percent spike in interest expense in just three years exceeds the percentage increase in government debt because interest rates rose concurrently. So the U.S. 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, U.S federal debt will be $25 trillion. An average interest rate of 4 percent – 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.”

I remember back when Republicans used to talk about getting spending under control and reducing the federal debt. I miss those days.

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