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Thursday, April 25, 2024

Interest Payments on the National Debt Will Soon Be the Largest Federal Expenditure

An abundance of financial indicators show how demand for U.S. debt is dwindling in global markets at an ominous time.

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In 1797, a year after revolutionary France abolished paper money following a disastrous inflationary experiment, U.S. President John Adams delivered a warning on government debt.

“The consequences arising from the continual accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own,” Adams told Congress.

It’s a speech that lawmakers in Washington, D.C., would do well to read — and quickly.

A new Bank of America analysis shows that interest payments on the national debt are set to explode in 2024 — rising much faster than the $870 billion annual increase that the Congressional Budget Office recently projected.

Even assuming the CBO’s more conservative projection, the picture is grim.

Analysts at the Peter G. Peterson Foundation estimate that the government will spend $12.4 trillion over the next decade just to service its debt. Financial analysts are flagging these surging interest payments, as well as the eye-popping amount of global debt.

“U.S. government spending rose by $162 billion in the last year just to cover interest on the nation’s debt,” Lauren Sanfilippo, an investment strategist for Merrill Lynch and Bank of America, observed in a video analyzing global debt, which stands at a record $307 trillion.

Carol Roth, a former investment banker and the bestselling author of You Will Have Nothingdid not mince words.

“This would make interest the largest [federal] ‘budget’ item,” Roth tweeted. “It’s an unsustainable clusterf***.”

These warnings, though dire, are not new. Policy experts and even some politicians have been warning about the looming debt threat for decades. Indeed, the CBO itself has been using the word unsustainable for years, something the left-leaning Brookings Institution pointed out back in 2015.

“The federal debt is worse than you think,” Brookings economist Ron Haskins warned.

Things have grown much, much worse since then, of course. Yet the federal government continues to rack up debt faster than ever. So why is nothing being done?

I asked this question to economist Dan Mitchell and entrepreneur Les Rubin, the coauthors of a new book titled The Greatest Ponzi Scheme on Earth.

Rubin, the founder of Main Street Economics, says only a massive public revolt against deficit spending can alleviate the problem, but the public doesn’t seem to recognize the severity of the matter for a simple reason: They’ve been hearing about the debt disaster their whole lives.

“That’s the biggest problem I face every time I discuss this,” Rubin said. “People say, ‘I’ve been hearing this for decades, and we’ve never run into a problem.’”

Without mass public outcry, it’s unlikely that politicians will take serious steps to address the snowballing debt. Many politicians and voters alike seem willing to overlook the problem until it becomes an existential crisis. The problem is, by then, it will likely be too late.

When people lose confidence in the American financial system, and countries and financial institutions stop buying our debt, the entire financial system could collapse, the authors say. And some evidence suggests that faith in the American financial system is already deteriorating.

An abundance of financial indicators show how demand for U.S. debt is dwindling in global markets. Central banks and investors overseas are buying up far less U.S. debt than they were a decade ago. These institutions today represent just 30% of U.S. debt compared to 43% a decade ago, the Wall Street Journal recently noted.

Demand for Treasury bonds has been particularly low. “Tails” (Wall Street lingo for higher-than-expected bond yields because of weak demand for Treasury securities by primary purchases) have been unusually long by historical standards at auctions, especially in the 30-year securities market. Meanwhile, the Federal Reserve last month reported a record annual loss, a loss that stems largely from the Fed’s mass purchase of Treasury bonds, which depreciated when interest rates were hiked to tame surging inflation.

This weakening demand for debt is occurring while the supply of debt is rapidly increasing. Some $10 trillion must be sold in 2024 to cover deficits and maturing securities. That is more than a third of U.S. gross domestic product. Meanwhile, the U.S. is projected to add another $20 trillion in new debt over the next decade.

Whether the market will absorb this amount of debt is unclear. The nation’s debt-to-GDP ratio is projected to be 130% in 2025. That is substantially higher than Greece’s debt-to-GDP level in 2010, and Mitchell and Rubin say time is running out to correct the course.

“Imagine you’re Greece in 2005,” Mitchell says. “That’s our concern.”

Thomas Jefferson and John Adams disagreed on a great many things. But like Adams, Jefferson saw “public debt as the greatest of the dangers to be feared.”

Americans can’t say they were not warned.

This article originally appeared in The Washington Examiner.

  • Jonathan Miltimore is the Senior Creative Strategist of at the Foundation for Economic Education.