Yesterday I mentioned that the national debt as a percent of GDP had declined under Joe Biden. And yet, interest payments on the national debt have skyrocketed from $500 million in 2020 to over a trillion dollars a year today. What's going on?
The national debt is held in treasury bills, treasury notes, and treasury bonds. Some are short term and some are long term. Here's the average:
On average, the national debt is held in securities with a six-year maturity. So when the Federal Reserve raised interest rates by five points, interest on the debt didn't instantly go up five points. It went up gradually as old notes were redeemed and replaced with new ones at a higher rate.
Overall, the Treasury Department says that average interest on the debt has gone up about 1.5 percentage points since 2020—from 1.77% to 3.32%. That's a lot less than five points, but it's still nearly double. So we have this:
In nominal terms—which is what gets most of the attention—the national debt has increased about a third and the interest rate paid on the debt has doubled. That means total interest on the debt has gone up roughly 130%. So even if you look at interest as a percent of GDP, it's still gone way up:
Bottom line: This is all about the Fed raising interest rates. If that hadn't happened, interest on the debt would have gone up about the same as GDP and would currently be somewhere around 2.5% of GDP, just like it has been for the past couple of decades. When interest rates go down, interest on the debt will go down too.
“When interest rates go down . . .”
So it all depends on whether Trump triggers a deflationary recession or hyper- inflation?
Interest is currently 14% of federal spending. https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/
As Kevin points out, interest us going to go up as old lower interest debt gets rolled over to new higher interest debt.
In addition, if investors anticipate inflation (far more likely than default as a solution to ballooning government debt) then they will drive up US interest rates further. At current interest payment levels that will become disastrous very quickly. For example, at the end of the Carter adminstration interest rates peaked at 16%. If that happens again interest will become more than a third of the budget.
Debt is at emergency levels today and has to be paid down to avoid this risk. You could do that by raising taxes but mainstream economists are almost unanimous that that would decrease growth. We need growth to increase the size of our economy to lower debt as a share of GDP and to allow us to compete with China in what is clearly an existential battle for control of the future.
The only other alternative is to cut Social Security and Medicaid. That will hurt politically and socially, but both have become unaffordable.
And cutting Social Security and Medicaid won't decrease growth? Because taking money from wealthy people is terrible, but taking it from middle class people, that's A-OK. In fact, we should cut taxes for businesses and wealthy people. Those tax cuts pay for themselves. After all, the main problem is that wealthy people have too little money and poor and middle class people have too much money. Amirite?
Debt is at emergency levels today and has to be paid down to avoid this risk.
Balderdash.
I think a reasonable case can be made that we shouldn't be running 7% of GDP deficits at full employment, and that therefore taxes should increase.
But we're certainly not in an "emergency."
Words have meaning!
Clinton raised taxes and the Republicans loudly proclaimed it would kill the then economic recovery and explode the deficit. The Democrats did get killed in the next election but the economic recovery accelerated and the deficit shrunk till it eventually disappeared. The difficulty with raising taxes is more political than economic.
Forbes famously advised their readers to sell before the inevitable crash.
I'm still waiting for someone to explain to me why federal debt and interest payments are a "crisis" when most of it (~70%) is held by either OTHER federal entities (the Federal Reserve, SS Trust Fund, etc.) or by private U.S. bondholders (banks, pension funds, individual investors) and thus the interest payments STAY RIGHT HERE IN THE U.S.
It's not analogous to a family, who pay interest on their debt to banks or other creditors OUTSIDE the family.
And even the 30% of federal debt that is held by foreign banks and creditors is still largely reinvested in the U.S., funding industries and jobs right here at home. Only a small fraction of those debt interest payments actually leave the country.
I understand why oligarchs hate federal debt, because that money is used to benefit the public rather than to benefit their greedy asses. But that's no reason for all of us non-oligarchs to get our shorts in a bunch over it.
Maybe I'm missing something. I am completely open to that possibility. Anyone?
"...but mainstream economists are almost unanimous that that would decrease growth."
You misspelled "right-wing hacks."
+1
Mainstream economists generally agree that raising taxes reduces growth, but don't agree on how much. History in many countries including the US indicates that increasing taxes has a very small effect on growth rates.
This is basic Keynesianism. Deficits are stimulative. Reducing deficits, whether by cutting expenditures or by raising taxes, reduces the stimulus. Cutting Social Security and Medicaid would have a severe depressive effect on the overall economy. Not only are they affordable, cutting them is unaffordable.
What is unaffordable is even more tax cuts for those who have most of the money….
But what do you expect from GOP math…
"Yesterday I mentioned that the national debt as a percent of GDP had declined under Joe Biden. ..."
This was because Biden inflated part of it away. That is GDP increased mostly because of inflation. Not because of real growth.
This was because Biden inflated part of it away.
The value of the country's existing debt is always eroded by inflation. Every administration that has presided over a decrease in public debt has benefited from inflation, just like households who owe debts likewise benefit from this dynamic.
Don't use the household analogy. It doesn't work because most of the interest paid on the debt goes to U.S. bondholders, so at least 70% of the money just recirculates right back into the U.S. economy.
The household analogy is an effective con that has been used by "fiscal conservatives" for decades to shift wealth upwards to the oligarchs.
It doesn't work because most of the interest paid on the debt goes to U.S. bondholders, so at least 70% of the money just recirculates right back into the U.S. economy.
It does work in the narrow way that I've used it here, which is to explain why our debt/GDP ratio falls over time. If you look at the long years between 1945 and the election of Reagan, that ratio indeed fell. And much of that was simply attributable to inflation.
"...Every administration that has presided over a decrease in public debt has benefited from inflation, ..."
And the Biden administration benefited more because of the 10% or so of abnormal inflation.
We could have just watched as millions lost their livelihood during the pandemic, and subsequently become homeless as they can't pay their mortgage/rent, have their vehicles repossessed, and begged on the street to feed their children. Inflation was a worldwide event, especially in wealthy western countries who supported their out of work citizens.
On GDP growth, here is real GDP: https://fred.stlouisfed.org/series/GDPC1
I calculate real GDP of about 3.2% per year, over the 15 quarters from end of 4Q/2020 to 3Q 2024.
Performance vs peers: https://rsmus.com/insights/economics/american-outperformance-in-the-global-economy.html
Yes.
"Biden inflated part of it away . . ."
Yeah, why did that dumb Joe give money to people who had lost their jobs and their homes (because of the pandemic)? What a dummy! Those people deserved to be homeless because they didn't learn how to make themselves into oligarchs.
Of course, that was not the MAIN cause of inflation. It was simply the surge of pent-up demand when the vaccines were rolled out and the pandemic came under control. All those companies that lost money when demand collapsed in 2020 and early 2021 then raised prices to recoup their losses when people started driving, shopping, and eating again. Unemployment dropped, the markets recovered, but prices went up.
Why didn't Biden just impose price controls, like they do in, say, Venezuela and North Korea? I just don't understand . . .
How about wage and price controls, like that socialist President Richard Nixon implemented, in 1971.
There is no public purpose today in paying interest on risk-free Government liabilities. It's just giving money to people because they already have money.
Paying interest on Treasury bonds is a legacy of gold standard money and the need to protect the Treasury's gold supply, with no relevance to fiat money. The Treasury swapped (nonconvertible) bonds for (convertible) money, temporarily precluding the possibility that the money would be presented to the Treasury for conversion to gold. The interest paid on the bonds was reward and motivation for the bond buyers assuming the risk the the Treasury would run out of gold, and the amount of interest is based on the market's perception of the risk.
There is no public purpose today in paying interest on risk-free Government liabilities.
I think the purpose is that people are unlikely to lend the government money unless it compensates them for doing so. Do you really mean to say that the government should just print whatever money it needs to pay its bills?
"Do you really mean to say that the government should just print whatever money it needs to pay its bills?"
That's exactly what the US Government does. Treasury bonds are no more and no less than future money and eagerly accepted as such, printed using the same machinery and out of the same thin air as any other form of government money, (Bonds are financial assets of the private sector and corresponding financial liabilities of the Government, just as paper notes and Federal Reserve Bank deposits are financial assets of the private sector and corresponding financial liabilities of the Government. All, again, created out of the same thin air.)
You're forgetting another function of interest rate on Treasury Bonds. This is the primary means for the Fed to control interest rates.
Interest on reserves does the same thing. Although it's less than obvious that interest on bonds or reserves does much besides give more money to rich people.
Treasury bonds are no more and no less than future money
Yes. Future money. That's very different from printing money that can be spent right away. Perhaps mediating government expenditures through treasury auctions is a good idea. And perhaps it is not. But regardless, funding government operations via the creation of fiat money courtesy of the electronic printing press is definitely not the same thing as as giving lenders IOUs in exchange for their cash (the latter, of course, removes immediately spendable cash from circulation).
I think you've nailed the theory of why monetary policy works, but I don't see a lot of evidence that it is effective in practice, possibly because of wealth effects?
"Bottom line: This is all about the Fed raising interest rates."
Exactly! The Fed has complete control over interest rates because it has unlimited power to buy bonds, at face value (implying zero interest) or whatever other price it wants.
Interest on the debt as a percentage of GDP is a function of both interest rates, and the size of the debt.
Fuck the debt. This isn’t to imply that we shouldn’t pay interest on the debt. But fuck the existence of the debt itself. Democrats always bend themselves out of shape to get rid of the deficit and start paying down the debt, only to be succeeded by Republicans who promptly pass tax cuts and blow it up again.
Fuck right-wing Lucy and her What About The Debt football. Kick her in the damn head instead. Leave the debt for Republicans to fix: after all, they’re the ones who keep creating more of it.
Yes, the interest burden on taxpayers will decline as and when FED cuts interest rates. But, and a big but, it will be slow. If average maturity of debt is 6 years, it takes that long to see the full effects of the deficit spending plus interest rate rises from the pandemic. If we could forget about Trump, we might think in 6 more years from now, we'd see the interest burden much lower.
But we can't forget about Trump (or the leftists who just want to print money). I remember the 70s and 80's--history rhymes and you'll see a new rhyme. And this time we won't have the "peace dividend" from ending the Cold War to help get us back to the conditions in 2000.
As long as the US dollar is the world's reserve currency, it all works. But it doesn't seem prudent to keep testing the limits of debt and the interest payments on the debt.
"How did you go bankrupt?"
"Two ways. Gradually, then suddenly."
Ernest Hemingway, The Sun Also Rises