Is The U.S. Government on The Brink of Bankruptcy?

The national debt of the United States refers to the total amount of money that the federal government owes to its creditors. As of 2022, the national debt of the US is approximately $30 trillion. This is a significant amount of money, and it raises concerns about the ability of the government to repay its creditors.

The US national debt is made up of a combination of Treasury securities, including Treasury bills, Treasury notes, and Treasury bonds. These securities are issued by the federal government to finance its ongoing operations and pay for various public expenses. Treasury bills, also known as T-bills, are short-term securities that mature in one year or less. Treasury notes, also known as T-notes, are medium-term securities that mature in two to ten years. Treasury bonds, also known as T-bonds, are long-term securities that mature in more than ten years.

The interest on the national debt is calculated based on a variety of factors, such as the type of security that is being held, the current market interest rate, and the length of time until the security matures. The federal government sets the interest rates on its securities, and these rates are determined based on a number of factors, such as the overall state of the economy and the government's borrowing and spending decisions. When an investor purchases a Treasury security, they agree to lend a certain amount of money to the government in exchange for regular interest payments until the security matures. At that time, the government repays the principal amount of the loan to the investor.

Yesterday we heard that the Fed is raising rates again. Here is the thing though, changes in the federal funds rate can have a direct impact on the interest rates that the government pays on its national debt. 

For example, if the fed raises the federal funds rate, the interest rates on Treasury securities are likely to also increase, which means that the government would have to pay more in interest on its national debt. This can have significant implications for the government's budget and its ability to finance its operations.

When the government pays more in interest on its national debt, it has less money available to finance its other operations and public expenses. For example, if the interest rates on Treasury securities increase, the government would need to allocate more of its budget to making interest payments on its debt, which would leave less money available for other expenses.

For example, if the government has to allocate more of its budget to making interest payments on its debt, it may have to cut back on other spending or raise additional revenue in order to balance its budget. This could lead to reduced funding for programs and services that are important to the economy, such as education, healthcare, and infrastructure.

Additionally, higher interest rates on the national debt can make it more expensive for the government to borrow money in the future, which could limit its ability to finance its operations and respond to economic challenges or invest in new initiatives, which could have a negative impact on the overall economy. 

For example, if investors demand higher interest rates to compensate for the increased risk of lending to the government, the government may have to pay more to borrow money in the future, which could put additional strain on its budget.

Higher interest rates can also make it more expensive for individuals and businesses to borrow money, which can have a dampening effect on economic activity and growth.

In 2012, we had 16 Trillion of debt, just a decade later we have more than doubled it with 31 Trillion dollars. Remember, the government is charged interest, in the same way that lenders charge an individual interest for a loan. How much the government pays in interest depends on the total national debt and the interest rates. 

Traditionally, the national debt has increased every year over the past ten years and it became the new normal. Interest expenses during these years have remained low due to low interest rates and due to a very low risk of default by the U.S. 

However, recent increases in interest rates as we just saw yesterday, are now resulting in an increase in interest expenses. 

Jerome Powell wants to be the next Volcker, but Volcker never had this problem to deal with. The U.S. is running a massive national debt. 30 trillion as we mentioned above, and that is with only 21 trillion in GDP and only 4 trillion in income from tax collections per year.  

Even if we use 100% of the tax proceeds every year to repay the entire national dent, that’s going to take over 7 years, and obviously that is a cartoonishly impossible scenario, so you get the point.

With the Fed hiking interest rates to tame inflation, our overall interest payments on the national debt increase as well. A prolonged period of high-interest rates and low growth can push us into a debt crisis where we have to prioritize interest payments over Infrastructure, Social Security, Healthcare, etc. 

That is a situation the US has not seen since the great depression. Right now we are paying about 400 billion dollars annually to service this debt, that is the equivalent of 1 billion dollars per day. 

Now imagine what happens if interest rates increase dramatically? Every percentage point that interest rates rise means an additional $150 billion more per year on $30 trillion dollars of debt. 

If the US government is unable to repay its national debt, it could have serious consequences for the economy and financial markets. In the most extreme case, the government could default on its debt, which means that it would fail to make the required interest and principal payments to its creditors. This could cause a major crisis in the financial markets, as investors would lose confidence in the government's ability to manage its finances and repay its debts. This could lead to a sharp increase in interest rates, which could have a ripple effect throughout the economy.

Additionally, a default on the national debt could also have significant implications for the government's credit rating. Credit ratings agencies evaluate the ability of governments and other borrowers to repay their debts, and a default could cause the government's credit rating to be downgraded. This could make it more expensive for the government to borrow money in the future, and it could also have negative impacts on the economy as a whole.

So while it’s nice to hear Powell is no longer thinks that inflation is transitory, ask yourself this question, why haven’t you heard him mention even once the huge debt problem I just explained in this article?

If inflation is at more than 7%, we would need multiple further rate hikes to get to a handle on it. The 4% rate we have now is not enough. A rate of 5% for example, which is still a long ways away from what would be needed to brake inflation, but what seems to be acceptable to Powell having heard his speech yesterday, will mean another 150 billion dollars in annual interest payments for the government. 

Who is going to pay for that? 

We make about 4 trillion per year, and that money will have to come from somewhere. We can’t print more, inflation is insane, we can’t raise taxes, people are already over taxed and over worked, we can’t cut education and healthcare, its been already chopped to pieces, barely any of it left, cut more of it off, and our GDP growth will suffer significantly. 

Here is what I though is missing from the current discussion on media outlets when it comes to inflation. For the Fed to be able to go down to 2% inflation, the  government has to stop its uncontrolled spending policy, that pretty much negates everything the Fed is doing with raising interest. 

Government spending must come down. 

But the reality is that US governments over the past 30 years have done the opposite. The debt-to-GDP ratio of 150% doesn’t even scare them. They think this party can go on forever. The Governments of the US have been on a 30 year old spending spree like no other, and this administration is no different, just like the one before it. This spending needs to stop if we want to have a shot at getting to 2% inflation with about 5% of interest rates. 

We also need higher GDP growth and higher tax collections, all at the same time, to fight this inflation before it gets out of hand. Interest rates will not be enough on their own. This means allowing for more regulatory freedom for business to generate growth, it means raising the necessary tax revenue with the lowest possible tax rates, simply increasing rates would have the opposite effect, this means going after corporate tax evasion using multinational overseas tax planning shelters. 

The bottom line here is simple. We can bring down inflation back to 2% but only if the Fed and the government actually work together to formulate a real strategy going forward, instead of just raising rates and ignoring all other problems.

Tom