Wolf Richter delivers the news that everyone with an IQ above room temp knew was coming:
There’s never a good time for this kind of news—as you’ll see from a few of the pictures below (not all included). Once the zero percent interest rate policy ended this was inevitable. It’s the blunt interest that the Fed uses to enforce fiscal discipline on politicians. Woops! Speaker Kev didn’t get the message.
Check it out:
US government interest expense shot up over the past four quarters in line with higher interest rates and the ballooning pile of debt. At the same time, tax revenues fell from the peak levels in 2022 and are back where they’d been in Q4 2021, which had been a record high at the time.
So, interest expense as percent of tax revenues – the primary measure of the burden of the national debt on government finances – spiked ...
In the 1980s, interest expense as a percent of tax receipts was around 50%. In the decades since then, Congress has been footloose and fancy-free about its spending and taxing policies, and there hasn’t been any discipline, no matter who runs the show. It’s just that priorities shift. A high interest-expense burden might be the only discipline left that will put some common sense into these people in Washington.
Right, so in the 1980s when some of us were paying on mortgages at over 13% interest expense for the good ol’ government was correspondingly through the roof. Eventually something had to be done, and was.
Here’s a picture that I really liked. Note that back in 1980 we still made stuff. The GDP was more meaningful back then, in my view. Now it seems to be more a measure of how well the rich are doing which each successive bubble that the taxpayers end up bailing out.
As I said, there’s never really a good time for those kinds of debt ratios, but this is coming at a particularly bad time. Speaker Kev wants to hand the Neocons a blank check to flush more money down the Ukraine drain—and we’ve been doing that at a phenomenal rate. Trust me on this one—we’ll never come out ahead on that one. Just as bad or worse, the rest of the world is no longer nearly as interested as they used to be in buying up US debt. In fact, some of the biggest holders are dumping US debt as discretely as possible, and some are even switching to gold. Correct me if I’m wrong, but this could foreshadow some serious inflation ahead.
Richter actually sees some good news—for the investing class. I don’t expect this to be great for the rest of us or for the country. Not without some change in spending:
Everyone knows that it was nuts to boost deficit spending as it was done over the past 5 years; it’s inflationary and contributed to the spike in inflation we have now; and as interest rates adjust to this higher for longer inflation, and as old securities with lower coupon interest mature and are replaced with new securities with higher coupon interest, the interest expense is going to be a headache.
On the other hand, fixed-income investors that buy those securities with the higher coupon interest are loving it, as they’re finally getting interest on Treasury bills that exceeds the current rate of CPI inflation. And those folks are going to pay federal income taxes on the interest income – along with folks who are paying income taxes on the interest income from CDs, money market funds, and high-yield savings accounts. So there’s more tax revenue heading toward the Treasury.
But what do I know. Comments are welcome.
2 cents: never too far from something bad, never too far from something good. I hear said that our National debt is so large it cannot be paid off, that our productive vitality got given to someone foreign. I say nutz to that. America plays large, mistakes can be huge, and we adapt anew. Under Clinton we had surpluses, and %debt service of GDP fell rapidemento. Useful productivity, besides individual striving, is in part cultural. The US population is if anything post-covid even more wound for change and creation. The manufacturing, agricultural, & invention capability vast. Add in blessed with great resources for most anything, I am of the belief we peeps will be okay. The US gov'ts, well, there's your problem. Taking $ for mischief away from our law-makers due to debt servicing helps slow the Leviathan
I might as well continue to plan to work through my 60’s and 70’s. (Not very hard though).