The Precarious Fiscal Position of the U.S.

Our most serious national problem is inflation and several of my recent posts have been devoted to this topic.  I believe that the Federal Reserve is serious about bringing down the rate of inflation to the desired level of 2%.  Getting this done has major implications for our economy.

The only way the Fed can lower inflation is to slow down the economy, perhaps causing a severe recession, by raising short-term interest rates.  But higher interest rates mean much higher interest payments on our enormous national debt.  Consider:

  • National Debt. The national debt held by the public (on which we pay interest) is now about $24 trillion, almost 100% of GDP, as high as it was at the end of WWII (see chart).  And it will likely continue growing rapidly in the years ahead.

  • Federal Spending could soon be dominated by just three different items, healthcare programs, social security, and interest payments on the debt (see chart).

  • Interest Payments on the Debt. Estimated at $400 billion for Fiscal Year 2022 (which ends on September 30), interest payments on the debt are projected to reach $1.2 trillion in 2032, just ten years from now (see chart).

  • 30-Year Debt Projection. From about 8% of total federal revenues in 2022, interest payments on the debt could easily spiral up to 40% of federal revenues by 2052, 30 years from now (see chart).

  • Alternatively, interest payments on the debt, at 1.6% of GDP in 2022, are projected to increase to 7.2% of GDP in 2052, 30 years from now (see chart).

Conclusion.  These projections about how fast interest rates, and thus interest payments on the debt, are likely to grow, are conservative and depend on how aggressive the Federal Reserve is in raising short-term interest rates.  If more persistent inflation requires the Fed to raise interest rates even higher, then interest payments on the debt will grow even faster than projected above.
If nothing is done in the meantime, a severe crisis will likely occur before interest payments on the debt reach $1 trillion per year (projected to occur in just 2030, eight years from now).
In other words, the President and Congress have only a few years to adopt strong fiscal restraints (i.e. dramatically reduce annual deficit spending) before a very serious crisis occurs.  Let’s hope that our national leaders are up to this arduous task!

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2 thoughts on “The Precarious Fiscal Position of the U.S.

  1. Jack,

    I am very appreciative that you take the effort to periodically describe this data set and its long-term implications. A quotation from Sir Arnold Toynbee applies. As a reminder, he was a British historian who published a 12-Volume book set based on his historical analysis of 20 human civilizations that has categorized our existence during the last 10-12 thousand years. He said:

    “Civilizations die from suicide, homicide.”

    It seems we may be facing a crisis involving moral reasoning.

    Paul

    • Let’s say we are on a suicidal path caused by exceedingly unclear fiscal thinking. It is really simple to calculate how interest payments on our debt will get out of control based on how much the Federal Reserve has to raise short-term interest rates to bring the inflation rate back down to the 2% level. It appears that very few people are willing to talk about this.

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