Let’s get one thing off the table. Putting aside the Biden administration’s fear mongering, the U.S. government will not substantively default on its debt in June 2023. The game of high-stakes chicken being played right now with congressional leadership will resolve before it is too late. In brief, the administration and Democratic leadership want to raise the debt ceiling, no questions asked. GOP leadership insist, not unreasonably, that there must be spending cuts. The question is, who blinks first? Given the alternative is financial markets Armageddon, a compromise will be reached. So everything is fine. Right?
And yet, and yet. This is a critical debate. Financial markets order, economic growth, employment levels, and price stability all hang in the balance. What are the issues at play? Why does it matter whether the debt ceiling is raised, and under what terms?
First, a few inconvenient facts. Since 2001 (the last budget surplus), the U.S. federal government has accumulated a budget deficit of over $20.7 trillion. That’s right. For every dollar of the $31 trillion of total federal debt, two-thirds of it has been used to finance the spending deficit of the past twenty years. This in turn has come from three main categories of expenditures: the endless wars in Afghanistan, Iraq, Syria and Libya (costing over $8 trillion, according to some estimates), expansion of government programs during the global financial crisis (GFC) of 2007-2009, and “pandemic relief,” i.e., government handouts during the COVID-19 experiment of 2020-2021. Indeed, of the $20.7 trillion cumulative deficit, $6 trillion was accrued in just two years of lockdowns, stymie checks, abuse of emergency powers, inefficacious paper mask wearing, and dangerous vaccine mandates. The perceived wealth effect of those years was a debt-enabled total fabrication, and we’re paying for it now.
We are on the verge of a debt and deficit fueled inflationary crisis, one in which our trading and investment counterparties lose all faith and confidence in our government and our currency, and price stability goes out the window.
As economist Peter Bernholz demonstrates in painstaking detail in his book Monetary Regimes and Inflations, all recorded high and hyper inflations are linked to unsustainable budget deficits. When the government prints money to pay for its deficit spending, as the U.S. has done for years now, inflation is sure to follow, albeit often at a lag of several years. Initially, runaway deficit spending can be economically stimulative, as we saw last year, but if moderate inflation turns into high inflation, the economy will slow dramatically. In inflations, wages typically fail to keep up with price growth, and then eventually economic slowdown results in recession and mass layoffs. These are high stakes indeed.
During the global financial crisis of 2007-2009, it was individuals and households, not the government, that had too much debt. When the U.S. housing market crashed nationwide, millions of underwater borrowers defaulted on their mortgages. Over three million homeowners received foreclosure notices in 2008 alone. According to data from the Federal Reserve, U.S. households held an aggregate $14.5 trillion in debt in 2008, representing over 100 percent of U.S. Gross Domestic Product (GDP). At that time, debt service payments comprised over 13 percent of personal disposable income.
While total household debt had increased to $19 trillion by the end of 2022, the ratio of household debt to GDP had fallen to below 77 percent, and debt service payments represented 9.7 percent of disposable income. This is in line with ranges typically seen since the data were first collected in 1980. However, these household debt levels are still too high, and are ultimately unsustainable if rates continue to rise. Even still, households don’t represent the worse of it.
Today, it is the U.S. federal government—not households—that is most overindebted and poses the greatest risk of destabilizing the U.S. financial system and its economy. During 2008, the national debt was $10 billion—decried at the time as being astronomically high—and represented 77 percent of GDP. Fast forward to 2023, and the figures have tripled … $31 billion of federal debt that equates to over 120 percent of GDP. That is only the federal government. Tack on the debt of the states and local municipalities, and total government debt to GDP is 132.3 percent.
When all U.S. household, corporate, and government debt is summed, the total represents a whopping 257.3 percent of GDP. This is a higher ratio than during the GFC, when total indebtedness was 242.4 percent of GDP. Things have gotten worse, not better. In the absence of a dramatic turnaround, this will not end well.
By including only the national debt, the United States is the fifth most indebted—relative to GDP—of any large country in the world (seventh if Lebanon and Cabo Verde, wherever that is, are included). On the same basis, Russia’s public debt is only 12 percent of GDP, and China’s 62 percent. That doesn’t sound like a good starting point for increasing geopolitical tensions with such rivals.
While household debt service costs are—for the moment—manageable, the debt service costs of the U.S. government are skyrocketing. The Federal government spent $475 billion—nearly ten percent of its entire budget—on debt service in 2022. This annual figure is expected to rise to above $800 billion in 2023 as both absolute debt levels and interest rates have increased from 2022. This is not sustainable.
There is only one cure. The U.S. government must cut spending. Substantially. We must curtail entitlement programs. “Money printer goes brrrr” must be stopped. The Keynesians must be defenestrated. The U.S. must stop burning money in ongoing support of the military-industrial complex’s endless wars, today focused on Ukraine, tomorrow somewhere else, never mind where or what for.
These asks are nearly impossible politically. Nonetheless, congressional leadership must hold the line.
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