By Kevin D. Williamson
Sunday, June 19, 2022
Fiscal Armageddon is coming — eventually. It is necessary not to be an alarmist about that, but equally necessary not to be naïve about it.
Fiscal Armageddon is what will happen when the U.S. government’s debt load exceeds its ability to comfortably service that debt. The U.S. government will face a budgetary crisis, possibly a sudden one, and its response to that crisis will create ripples — or a tsunami — across the world economy. How bad it is and how Washington responds will determine the difference between a painful but manageable economic setback and a global catastrophe.
The U.S. government can, in theory, run a small deficit more or less indefinitely. More specifically, the idea is that as long as our economy is growing at least as fast as our public debt is, then the debt is sustainable as a share of GDP. With the usual caveat that the federal budget is not very much like a household budget, think of it this way: If you make $100,000 a year and you carry an average balance of $5,000 on your credit card from month to month, then you aren’t in terrible shape — and if, in ten years, you are making $1 million a year and have $50,000 in revolving debt, then you are still in pretty good shape. On the other hand, if in ten years you are making $110,000 and you have $50,000 in credit-card debt, you are in a pretty poor position. The issue is not so much absolute debt as the relationship between debt and income.
The problem is that our federal debt currently is growing a lot faster than our economy. In 2021, our federal deficit was 12.4 percent of GDP ($12.8 trillion), while real GDP growth was only 5.7 percent — i.e., the federal debt grew more than twice as fast as the U.S. economy. We’re the guy who got a $10,000 raise at work and celebrated with a $25,000 vacation.
For a minute there, the fashionable thing among our progressive friends was so-called Modern Monetary Theory (MMT), a fanciful economic idea that holds that as long as a government can borrow in its own currency, then it can spend as much money as it likes without worrying about debt or inflation — during and after Covid-19, the U.S. government ran something like an MMT experiment, contributing to the destructive inflation we currently are suffering from.
Now, MMT is out, and reality is back in.
So, what would a fiscal crisis actually look like?
There are a couple of ways that a crisis could unfold. One is a failed bond auction: When the U.S. government wants to borrow money, it sells bonds, and it cannot sell those bonds unless somebody wants to buy them. The government sometimes engages in some shenanigans in which it buys its own bonds (the Fed buys Treasury bonds and calls this “quantitative easing”), but there are limits on how much of that it can really do. At some point, Washington will offer bonds and the bond market will say, “No, thanks!” When that happens, Washington will have to make those bonds more attractive by raising the interest rates on them. Again, to use the household analogy: If you have good credit, you can get a credit card and a mortgage at a pretty good rate; if you have poor credit, you might still be able to get a credit card and a mortgage, but you’ll pay a lot more interest on them.
The other most likely version of this fiscal crisis has to do with interest rates, too — not rates on future debt, but rates on the debt the U.S. government already is carrying. The U.S. government now has a little more than $30 trillion in debt, roughly $24 trillion of which is held by the public. The “average maturity” of that debt is 65 months, meaning on average, a bond comes due after 65 months, at which point the debt has to be refinanced. But about a fourth of U.S. government debt is in Treasury bills, which have a maturity of one year or less; about half of it is in Treasury notes, which have maturities ranging from two to ten years; and only about 14 percent of it is in long-term bonds, those with maturities of ten years or more. Another wrinkle is that about 8 percent of the debt is in instruments calls TIPS, or Treasury Inflation-Protected Securities — bonds for which the interest rate goes up to match inflation.
As it stands, interest on the debt already accounts for almost $1 out of every $10 the government spends. If interest rates go up sharply, so will federal debt-service payments. Under current conditions, the Government Accountability Office already estimates that interest payments will account for 15 percent of all federal spending by 2035 and 27 percent by 2050 — and those numbers could be much higher if there are big increases in interest rates, which is a real possibility. But I should emphasize here that the GAO already forecasts that interest payments will grow to 27 percent of federal spending in just a few years — which would mean that we’d be spending more on interest payments than we spend on Social Security, which currently accounts for a larger share of federal spending than any other program. Put another way, the thing we will be spending the most on in the future is previous spending.
What is Washington going to do in that situation?
Washington could get its affairs in order with some combination of serious spending cuts, entitlement reforms, and tax increases. The problem with that is that there are three things Washington is determined not to do: cut spending, reform entitlements, and raise taxes. Fiscal crises have a way of bringing out the best in generally responsible governments: It was a left-wing government in Canada, not a conservative one, that responded to that country’s fiscal crisis in the 1990s with a conservative’s dream program: $10 in spending cuts for every $1 in higher taxes. But Canada is in many ways a more responsibly governed country than the United States is, and it has a less dysfunctional political culture.
So instead of doing the hard right thing, Washington is likely to do the easy wrong thing: inflating its way out of its debt. Modern Monetary Theory is right about one thing: Washington really can print as much money as it likes, and its creditors will have no choice but to accept payment in devalued U.S. dollars — though they won’t like it, and they will be less likely to lend Washington money in the future. That will be bad for a lot of bond investors, and it will be downright catastrophic for ordinary Americans. Right now, Americans are rightly very distressed by the fact that our cash savings and our incomes are being devalued at a rate of almost 11 percent a year thanks in large part to irresponsible spending policies enacted during the Covid era, and — more to the political point — by the determination of the Biden administration and congressional Democrats to keep up that irresponsible spending and to spend even more if they can. Losing your savings and your income at a rate of 11 percent a year is painful — losing them at a rate of 25 percent a year will be a national economic disaster without precedent.
Destructive inflation rates are not something that happens only to basket cases such as Zimbabwe and Venezuela. In the 1970s, inflation in the United Kingdom hit almost 15 percent; in the United States at the same time, the rate was 13.3 percent; in Spain, the inflation rate hit 28.4 percent in 1977; France’s inflation rate was above 15 percent in the 1970s and got close to 20 percent in the 1960s; even Switzerland hit 12 percent inflation in the 1970s. By way of contrast Germany, a country that was ruined by inflation in the Weimar period, kept its inflation rate under 10 percent during the 1970s crisis and has averaged only 2.38 percent inflation since World War II — Klaus knows what he is doing.
I know that I am a broken record on this, but I will once again repeat: The sooner we act, the more options we will have, and the better we will be able to spread out the pain and minimize the disruption; the longer we wait, the worse the crisis will be when it hits, the fewer choices we will have in responding to it, the fewer resources we will have to see ourselves through it, the more destructive it will be, and the more vulnerable it will leave this country.
You are getting just a little taste of the pain right now, America. How much more do you want?
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