All things political: The United States is heading for a self-made financial disaster

Adam Haber

Once upon a time, the Republican Party espoused fiscal discipline.

A balanced budget and paying down the deficit were bedrock principles that right-leaning congressional candidates drove home at every opportunity.

Leading the way with this mindset used to be Speaker of the House and former Vice Presidential Candidate Paul Ryan. Those days are over.
Last week, in order to mitigate a shutdown of the federal government, Democrats and Republicans agreed to a budget deal that adds an additional $300 billion dollars in new spending and $90 billion in disaster relief over the next two years.

Honestly, who wouldn’t embrace additional spending for important programs? However, without corresponding budget cuts to offset new spending, there is no chance for a balanced budget.
The last time the Congressional Budget Office forecasted the deficit for the coming fiscal year, which starts October 2018, it was close to $700 billion.

With the approved increase in spending, new estimates put it closer to $1.2 trillion. This doesn’t include the yet to be detailed additional $1.5 trillion infrastructure plan President Trump is preparing to announce.

Instead of repaying the over $20 trillion in National Debt, Congress added to it with reckless abandon.
To be fair, Democrats have been willing partners in blowing out the deficit.

Under President Obama, national debt ballooned, doubling to roughly $19 trillion.

One inherent problem lies in this simple fact: For a politician, it’s never good politics to make tough financial decisions for the future when you are always worried about re-election. Term limits for Congress would help fix this.

In my opinion, there are only two reasons to run huge deficits.

The first is when the fate of humanity is at stake, for example during World War II. The other is to stimulate the economy during a deep recession or depression, like former President Obama did to stave off the imminent collapse of the financial system, just 10 short years ago.

However, that’s not what’s happening here. Deficit spending during a strong economy is a clear recipe for disaster. When the economy is strong, like it is now, the government should be paying down debt, not increasing it.
Interest on almost $21 trillion in debt service eats up about 6.5 percent of the fiscal year 2018’s $4.094 trillion budget.

The weighted average maturity of all outstanding Treasuries stands at roughly 70 months. When interest rates finally trend back up to their historic average, from under 2.9 percent today to 4.9 percent (using the 10 Year Treasury Bond as a benchmark), it’s easy to imagine a financial catastrophe less than six years away.
If interest rates do trend back up to the historical average, debt service on close to $21 trillion will go up by an additional $200 billion or more by 2025, if all interest rates go up 2 percent in the near future.

That increase in debt service alone will cost more than 5 percent of the current annual budget.

To pay for the spike in debt service, the government would have to cut 5 percent from every government program, from Social Security to the military, and the results would be devastating and destabilizing to our country.

If interest rates quickly go up more than 2 percent and remain high for an extended period of time America would be in serious trouble.
This sad story ends three ways:
1. Congress realizes it can’t run deep deficits forever and passes a balanced budget amendment. This will cause short-term pain but be a blessing in the long run as government efficiency will become paramount and the public will regain faith in their Congressional leaders for making sound financial decisions. This is the prudent path.
2. High inflation will quickly cheapen the value of the debt (inflation can’t stay low forever), and the government will print money to devalue its own currency, which is what happened in the extreme in Germany during the Weimar Republic from 1919-1933. Not a good choice.
3. The U.S. Government defaults on its debt.

This would be a catastrophe as world economies are now intertwined and this would cause by far the most severe damage.
Nobody likes to pay taxes and everyone would like more income, that’s why, initially, everyone loves a tax cut.

However, unless the federal government decreases spending to coincide with lower federal Revenue resulting from these tax cuts, the proverbial party will come to an abrupt end, and sooner than you think.

About the author

Adam Haber

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