The national debt has surpassed $22 trillion for the first time in U.S. history, according to new Treasury Department data. And trillion dollar annual deficits are now the norm, according to the Congressional Budget Office (CBO), which has issued some rather gloomy projections for the years ahead.
The CBO estimates the deficit will average $1.2 trillion each year from 2019 and 2028, for a total of $12.4 trillion. At the current rate, the nation will tack on another $10 trillion in new debt in the next eight-plus years.
This explosion in debt has occurred despite the fact that the economy has grown in each of the past nine years. In fact, this is the second-longest economic expansion since World War II ended. Employment and job creation continue to be robust. Just imagine what happens when the next recession or financial crisis unfolds and the government decides to implement another emergency spending package.
Annual deficits exploded during the Great Recession, when the government stepped in to fill the gaping void left by the crippled private sector. Yet, though we are no longer in an economic crisis, massive deficits continue because tax revenue has fallen (due to tax cuts) and federal spending continues to rise. This combination is a recipe for disaster.
The U.S. now pays an average of $1 billion every day in interest on the debt, which is money that could otherwise be spent on infrastructure, healthcare, education or anything else. The CBO projects that the costs of servicing the debt will surpass defense spending by 2025.
The public has been able to ignore this explosion in debt because interest rates are historically low, as I've previously illustrated. For example, at the beginning of this century, the yield on the 10-year Treasury averaged 6.03 percent. It fell to an average of just 1.80 percent in 2012 and is averaging 2.71 percent this year. If the 10-year were to revert to its average in 2000, the effects would be widely felt and impossible to ignore.
Higher interest rates would lead to higher borrowing costs across the economy and would surely slow economic growth, which would only worsen the effects of nation’s debt burden.
Who owns (or is owed) the U.S. debt? Most of it is owned domestically by individual banks and investors, the Federal Reserve, state and local governments, mutual funds, pension funds and insurance companies. However, 30 percent of the national debt is held by foreign governments and investors.
In a fiscal squeeze, the U.S. government will likely give precedence to foreign borrowers, otherwise they would stop lending. The government can always add new taxes on its own citizens and hope that inflation lessens the burden of the debt, even while it imposes heavy burdens on the citizenry.
Some argue that the debt isn’t such a big deal since the economy continues to grow right along with the debt. According to this argument, it’s the debt-to-GDP ratio that really matters. The U.S. economy will produce an estimated output of $21.5 trillion this year, while the debt is already above $22 trillion in February.
However, the U.S. doesn’t fund its annual budget with the entire economy -- it pays for it with tax revenues, which continually come up short. The nation must finance these annual shortfalls by selling Treasuries (aka, debt). Naturally, the country can’t service its debt with tax collections. In essence, the government issues new debt just to pay off old debt, like borrowing from Peter to pay Paul. If the U.S. could finance its budget and deficit with its entire economy, we wouldn't be in this financial mess in the first place.
So, where is the reasonable concern in D.C. about this debt mountain? It’s nowhere to be found. While the GOP used to howl about the debt in past years, it has suddenly fallen silent.
The Daily Beast reported that when senior officials attempted to warn the president of the impending debt crisis in early 2017, Trump replied, “Yeah, but I won’t be here.”
That’s shirking his responsibility in a horribly negligent manner, but it merely echoes the sentiments of many elected representatives in Congress and the White House for the past few decades. Most have played a game of “kick the can,” passing along the fiscal responsibility -- and a looming crisis -- to some future group of officials.
Have no doubt, however, a debt crisis is speeding our way, like a freight train with no brakes.
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