Debt, deficits, and debt interest payments have damaged America’s finances in a way that only a corrupt clown government could make possible. Decades of overspending are coming home. We all live with the consequences.
The Treasury recently published monthly financial statements showing income and expenditure up to September 2024. monthly statement This is especially interesting because it provides the final tally for fiscal year 2024. So how did things end up with another wasteful year on the books?
In fiscal year 2024, the U.S. Treasury raised $4.92 trillion. But it paid out $6.75 trillion. The difference, or deficit, was $1.83 trillion. And this difference was covered by debt.
The biggest expenditure was, of course, Social Security, totaling $1.4 trillion. This was followed by the healthcare sector at $912 billion. The third highest expenditure was net interest on debt, which amounted to $882 billion. Of note, net interest on debt exceeds both Medicare ($874 billion) and Defense ($874 billion).
Net interest on debt increased sharply in FY2024 due to relatively high interest rates. By comparison, net interest on debt was $659 billion in fiscal 2023 and only $475 billion in fiscal 2022. That means net interest on debt in fiscal 2024 was about 85% higher than it was just two years ago.
These massive debt interest payments are a disaster for Washington. As more and more of the budget is used to service debt, less money is left available to pay for other government services. At this rate, net interest on the debt will exceed Social Security as the top expense in just three years.
rack and stack
Rising debt service payments also blow up the deficit, which piles up on top of total debt. This results in more debt to be paid off through higher debt interest payments. We can see a vicious cycle where debt interest payments lead to the accumulation of more debt, which in turn increases debt interest payments.
That’s why the federal government has a $1.83 trillion deficit in fiscal year 2024. This is also why there is little hope that Congress, which holds the funding authority, will reduce deficit spending in the coming years.
Rising debt and rising debt interest payments ultimately lead to a debt death cycle, where more and more borrowing is needed to make debt interest payments higher and higher. At this point, debt interest payments are eating up the budget, and it is too late for the U.S. government to change course.
Nonetheless, there is plenty of time to use tricks to postpone the settlement date. Rather than making difficult decisions now, Washington demands more accommodating lending terms, even if market conditions do not justify them. Nonetheless, the Fed is willing to do this.
Soaring debt interest payments are the main reason the Federal Reserve cut the federal funds rate by 50 basis points since the FOMC meeting on September 18. Consumer price inflation is lower than it was a few years ago, but still well above the Fed’s arbitrary 2% target. Likewise, the unemployment rate is only 4.1%.
This is not a condition that guarantees cheaper credit.
Unconventional Monetary Policy
The Fed’s intention to cut interest rates was to influence Treasury yields. The idea is to force the Treasury to lower interest rates so it can finance Washington’s massive $35.7 trillion debt pile.
But sometimes things don’t go as planned. Treasury yields have risen (not fallen) since the Fed cut interest rates.
Specifically, after the September 18 rate cut, the yield on the 10-year Treasury note jumped from 3.70% to about 4.20%. So if the goal was to allow the Treasury to finance debt at lower interest rates, the Fed’s actions appear to have backfired.
Perhaps that will change, and Treasury yields will eventually follow the Fed’s rate cuts in the coming months. However, it is unlikely that the 10-year Treasury yield will come close to the level seen in July 2020, when it hit a record low of 0.62%.
That day marked a turning point in the credit cycle. Therefore, we should expect interest rates to rise over the next 30 years.
What this means is that the Fed cannot substantially lower the Treasury’s funding costs through traditional monetary policy. So what will the Federal Reserve do? How will interest rates be lowered so the Treasury can cover Washington’s massive debt?
In other words, the Fed will have to return to unconventional monetary policy. This means more quantitative easing (QE).
If you remember, QE is when the Fed creates credit out of thin air and then uses that credit to buy Treasury bonds at interest rates that are much lower than what the market is demanding. This form of extreme credit market intervention was adopted after the financial crisis of 2008-2009 and again during the coronavirus crisis.
The stupid reason we’re seeing more QE
In mid-2008, just before the Lehman Brothers bank collapse, the Fed’s balance sheet was about $900 billion. By mid-2022, it would exceed $8.9 trillion. About $8 trillion in printing press money was pumped into the financial system and economy to bail out big bankers and corporations.
Since mid-2022, quantitative tightening has reduced the Fed’s balance sheet to about $7 trillion. But there is little hope that the Fed’s balance sheet will ever recover to $900 billion.
If government bond yields continue to surge, stressors will appear in financial markets. Maybe the stock market will take some of the wind out of it. Maybe rising mortgage rates may finally break the treacherous residential real estate market. There will probably be a wave of bank failures.
Nonetheless, the Treasury must finance Washington’s $35.7 trillion debt pile. And with annual net interest on debt approaching $1 trillion, something is going to have to give.
Lenders, worried that inflation could soar again, are demanding higher yields from the Treasury. Unfortunately, financing debt at these interest rates is consuming more and more of our budgets. So Washington needs lower interest rates.
This is where the Fed’s QE comes into play. All it takes is a recession or another crisis to justify it. Then the Fed will be back in the race. They create credit out of thin air and use it to buy government bonds while artificially lowering interest rates.
Previous QE runs created all kinds of bubbles in stocks, real estate, and bonds. It also heralded rampant consumer price inflation and the continued depreciation of the dollar.
The change in gold prices over the past 12 months (from $2,000 to more than $2,700 per ounce) serves as a signal. From our perspective, this is once again a sign that the Fed’s central planners are about to do something incredibly stupid, like printing money to pay interest on government debt.
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thank you,
minnesota gordon
for economic prism
More QE is back in the economic prism for stupid reasons
