Debt, deficits, and debt interest payments have crippled America’s finances in a way that only a government of corrupt clowns could have made possible. Decades of overspending are coming home to roost. We all get to live with the consequences.
The Treasury Department recently published its monthly treasury statement showing receipts and outlays through September 2024.This monthly statement is of particular interest because it provides the final tally for fiscal year 2024. So, with another wastrel year in the books, where did things end up?
For FY2024, the U.S. Treasury collected $4.92 trillion. However, it paid out $6.75 trillion. The difference, the deficit, was $1.83 trillion. And this difference was covered with debt.
The top outlay, of no surprise, was social security, which totaled $1.4 trillion. This was followed by health at $912 billion. The third highest outlay was net interest on the debt, which came in at $882 billion. Of note, net interest on the debt exceeded both Medicare ($874 billion) and national defense ($874 billion).
Net interest on the debt increased dramatically in FY2024 because of relatively higher interest rates. As comparison, in FY2023 net interest on the debt was $659 billion and in FY2022 it was just $475 billion. In other words, net interest on the debt was roughly 85 percent higher in FY2024 than it was just two years ago.
These massive debt interest payments are a disaster for Washington. When more and more budget is used to service debt, there is less budget available to pay for other government services. At this rate, net interest on the debt will exceed social security as the top outlay within just three years.
Rack n’ Stack
Rising debt interest payments also blow out the deficit, which is then racked and stacked on top of the total debt. This results in even more debt that must be serviced through greater debt interest payments. You can see the vicious cycle of debt interest payments driving the buildup of more debt, which in turn drives up debt interest payments, and on and on.
This is why the federal government ran a deficit of $1.83 trillion in FY2024. It is also why there is little hope that Congress, having power of the purse, will reduce deficit spending in the years ahead.
Rising debt and rising debt interest payments ultimately lead to a debt death spiral, where more and more borrowing is needed to service higher and higher debt interest payments. At this point, debt interest payments are consuming the budget, and it’s too late for the U.S. government to reverse course.
Still, there is plenty of time to employ gimmicks to postpone the day of reckoning. Rather than making tough decisions now, Washington demands more accommodative lending terms even though market conditions don’t justify them. Still, the Federal Reserve is more than happy to oblige.
Ballooning debt interest payments are the main reason the Federal Reserve cut the federal funds rate by 50 basis points following the September 18 FOMC meeting. Consumer price inflation, while lower than several years ago, is still well above the Fed’s arbitrary 2 percent target. Similarly, the unemployment rate is just 4.1 percent.
These are hardly conditions that warrant cheaper credit.
Unconventional Monetary Policy
The intent of the Fed’s rate cut was to influence Treasury yields. To compel them lower so the Treasury could finance Washington’s massive $35.7 trillion pile of debt.
Yet sometimes things don’t go according to plan. Since the Fed’s rate cuts, Treasury yields have gone up (not down).
Specifically, since the rate cuts on September 18, the yield on the 10-Year Treasury note has spiked from 3.70 percent to about 4.20 percent. Thus, if the goal was to allow the Treasury to finance the debt at lower rates, the Fed’s actions appear to have backfired.
Perhaps this will change, and Treasury yields will eventually follow Fed rate cuts down in the months ahead. But it is highly unlikely rates will approach anywhere close to where they were in July 2020, when the 10-Year Treasury rate hit a low of 0.62 percent.
That day marked the turning point in the credit cycle. Thus, you should expect interest rates to rise over the next 30 years.
What this means is that the Fed will not be able to substantially lower financing costs for the Treasury using traditional monetary policy. So how will the Fed do it? How will it drive down interest rates so that the Treasury can finance Washington’s massive debt?
In short, the Fed will have to return to unconventional monetary policy. This means more quantitative easing (QE).
If you recall, QE is where the Fed creates credit from thin air and then uses this credit to buy Treasuries at much lower rates than the market would otherwise demand. This form of extreme credit market intervention was employed following the 2008-09 financial crisis and again during the coronavirus fiasco.
Dumb Reasons Why More QE Is Coming
In mid-2008, on the eve of the Lehman Brother’s bank failure, the Fed’s balance sheet was about $900 billion. By mid-2022, it had topped $8.9 trillion. This roughly $8 trillion of printing press money was injected into the financial system and the economy to bailout big bankers and businesses.
Since mid-2022, through quantitative tightening, the Fed’s balance sheet has been reduced to about $7 trillion. But there is little hope the Fed’s balance sheet will ever return to $900 billion.
If Treasury yields continue their rapid ascent, stressors will appear in financial markets. Maybe some wind will be taken out of the stock market. Maybe rising mortgage rates will finally topple the perilous residential real estate market. Perhaps there will be a wave of bank failures.
Regardless, the Treasury must finance Washington’s $35.7 trillion debt pile. And with annual net interest on the debt approaching $1 trillion, something will have to give.
Lenders, fearing another spike in inflation, are demanding more yield from the Treasury. Unfortunately, financing the debt at these rates is consuming a greater and greater part of the budget. Thus, Washington needs lower rates.
This is where the Fed’s QE comes in. All that is needed is a recession or some other crisis to justify it. Then the Fed will be off to the races again. Creating credit from thin air and using it to buy Treasuries while artificially driving down interest rates.
Previous QE operations have resulted in all sorts of wild bubbles in stocks, real estate, and bonds. They have also presaged rampant consumer price inflation and the dollar’s relentless loss of value.
Gold’s price movement over the last 12 months – from $2,000 to over $2,700 per ounce – serves as a signal. From our perspective it is a signal that, once again, the central planners at the Fed are about to do something incredibly dumb – like print money to pay the interest on government debt.
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Sincerely,
MN Gordon
for Economic Prism
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