Menckens Ghost

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Mutual suicide pact of Dems & Reps

Dear Thinkers:

Political divisiveness in the nation is a myth.  Both parties are in lockstep where it matters.  They and their minions are marching off a debt cliff together, with nothing in a democracy to stop them.  See article below about what rising interest rates mean to government spending. At current trends, interest on the national debt will surpass Medicaid spending by 2020, defense spending by 2023, and all nondefense discretionary spending combined by 2025.  The article does not mention the consequences of the efforts of China and other countries to replace petrodollars with other currencies and to eliminate the dollar as the world's reserve currency.  The more we try to put banking restrictions on bad actors around the world, the more that other nations seek alternatives.

Cheers,

Mencken's Ghost
 

U.S. on a Course to Spend More on Debt Than Defense

Rising interest costs could crowd out other government spending priorities and rattle markets

By

Kate Davidson and

Daniel Kruger

The Wall Street Journal, Nov. 11, 2018 7:00 a.m. ET

In the past decade, U.S. debt held by the public has risen to $15.9 trillion from $5.1 trillion, but financing all of that debt hasn't been a problem. Low inflation and strong global demand for safe U.S. Treasury bonds held the government's interest costs down.

That's in the process of changing.

Interest rates are rising as inflation normalizes around the Federal Reserve's 2% target. That and the sheer scale of debt being accumulated by the federal government has put the U.S. on a path of rising interest costs that in the years to come could crowd out other government spending priorities and rattle markets.

In 2017, interest costs on federal debt of $263 billion accounted for 6.6% of all government spending and 1.4% of gross domestic product, well below averages of the previous 50 years. The Congressional Budget Office estimates interest spending will rise to $915 billion by 2028, or 13% of all outlays and 3.1% of gross domestic product.

Along that path, the government is expected to pass the following milestones: It will spend more on interest than it spends on Medicaid in 2020; more in 2023 than it spends on national defense; and more in 2025 than it spends on all nondefense discretionary programs combined, from funding for national parks to scientific research, to health care and education, to the court system and infrastructure, according to the CBO.

From defense to Medicaid, in other words, it will become a bipartisan challenge. The early 1990s were the last time the government's interest expenses were high and rising. Back then, Washington politicians routinely worried about "bond market vigilantes" on Wall Street who threatened higher costs on debt if deficits weren't contained.

To confront the problem, President George H.W. Bush did a budget deal with Democrats that raised taxes on the wealthy, alienating Republicans and undermining his chances for a second term in office. President Bill Clinton abandoned campaign promises of a big fiscal stimulus program.

By next September a divided Congress will need to decide whether to extend a budget agreement which boosted federal spending by $300 billion for two years over limits enacted in a 2011 law. Beyond that lawmakers need to decide whether to extend President Trump's individual income tax cuts, which are set to expire in 2025.

"The fact that interest is the fastest growing part of the budget and is on track to eclipse other important pieces of the budget—for instance, spending on children—is going to cause more hesitation just to charge every single item," said Maya MacGuineas, the president of the Committee for a Responsible Federal Budget, a deficit watchdog group.

The Treasury Department said last month outlays for net interest on the public debt rose 20% in fiscal year 2018, one of the key drivers behind increased spending last year.

Debt as a share of gross domestic product is projected to climb over the next decade, from 78% at the end of this year—the highest it has been since the end of World War II—to 96.2% in 2028, according to CBO projections. As the overall size of our debt load grows, so too do the size of interest payments.

At the same time, the Federal Reserve is in the process of gradually raising short-term interest rates. It is doing that because inflation has moved up to 2% from near zero in 2015. With unemployment low it could go even higher. In the next five years about 70% of the federal debt will mature and need to be refinanced at these higher interest rates.

President Trump says the central bank and its Chairman Jerome Powell are raising rates too fast, unnecessarily constraining economic growth and making it more difficult to manage the government's debt.

"I would like to see the rates be low and pay amortization, pay off debt," Mr. Trump said in an interview with The Wall Street Journal last month. "And when he keeps raising interest rates, you can't do that."

Even if interest rates were falling, the government wouldn't be anywhere near paying off debt. The U.S. Treasury is set to issue twice as much debt in 2018 as it did in 2017, according to Treasury Department borrowing estimates. That's because budget deficits are rising, the result of slow revenue growth associated with tax cuts and this year's deal between Republicans and Democrats to increase spending.

The deficit will rise even further in the event of a recession, as revenue slows and automatic spending for programs such as unemployment benefits and food stamps increases. That would lead the government to borrow even more, adding to interest expenses. The CBO's projections don't factor in a recession in the next decade, but it would be remarkable if one doesn't occur. The expansion is already on track to become the longest in U.S. history next June.

Looking back on what happened in the 1990s, Dean Baker, the co-director of the Center for Economic and Policy Research, a left-leaning think tank, says, "we've been there before, and it's worked out."

Deficits back then turned to surpluses, thanks to tough budget choices by both parties and a long period of strong economic growth. Policy makers will have plenty of opportunities to confront deficits in the coming years, Mr. Baker said.

But the opportunity to ignore them could be passing.

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