The 2011 fiscal year concluded on September 30th, and a thorough examination of U.S. government revenue and expenditures has taken place. The total revenue collected that year reached $2.3 trillion, while spending soared to $3.6 trillion. This resulted in a staggering deficit of $1.3 trillion, necessitating increased borrowing that surged the national debt to $14.8 trillion—over 100% of the nation’s GDP.
Just five years ago, the thought of a $1 trillion annual budget deficit would have been met with disbelief and concern. In the prelude to the 2008 financial crisis, even a $500 billion deficit was deemed outrageous. Yet, in today’s economic reality, the federal government has consistently exceeded its tax revenue by $1 trillion each year for the last three consecutive years.
Unsurprisingly, such fiscal practices come with serious repercussions. Interest payments on the national debt are now the fastest-growing segment of the budget. In 2011 alone, net interest payments surged by 15.7% to reach $227 billion.
The U.S. government is facing significant financial strain. Every month, it incurs over $108 billion in new debt just to maintain operations. So far, the country has relied on the goodwill of its creditors, who continue to purchase Treasury bonds at historically low interest rates.
This situation is not sustainable. If a U.S. Treasury auction fails to attract bids, it will signal the end of the burgeoning debt bubble. Such an event would likely lead to increased interest rates and a decline in stock prices, as investors demand lower price-to-earnings ratios. While this may seem some years away, significant reductions in deficits must occur to prevent this crisis from materializing sooner.
The Deteriorating Landscape
The enormity of the national debt poses a formidable challenge for future economic growth. Instead of being allocated towards new capital investments that could spur development, funds will likely be diverted to cover interest payments on existing debt. Essentially, earnings that should support growth have already been exhausted.
This creates a reality where individuals may experience stagnant incomes while facing escalating living costs, ultimately leading to a decline in their financial well-being. Furthermore, the quality of services in their surroundings is likely to deteriorate, as many state and local governments struggle to meet their obligations.
To illustrate this, take Illinois, which consistently falls behind in settling its bills. “As of early last month, the state had 166,000 unpaid bills totaling an astounding $5 billion, with nearly half of that amount overdue by over a month and some dating back to 2010,” reported AP. Thankfully, they are still making some payments, but for how long?
In Prichard, Alabama, facing dire warnings about its city pension fund’s impending insolvency, the administration made a drastic decision: they halted monthly pension checks for 150 retired workers, in direct violation of state law requiring the payment of promised retirement benefits. This situation was reported by The New York Times.
Recently, Harrisburg, Pennsylvania, filed for bankruptcy due to crippling debt resulting from an incinerator project, which left the city unable to fund even the most basic services.
Such episodes will likely become increasingly common across the nation in the years to come.
Facing the Consequences
Eventually, all debts must be addressed. Amassing more debt to cover existing obligations does not eliminate those liabilities; it merely delays the inevitable reckoning, complicating the situation further when it arrives.
This principle is straightforward: Spending beyond your means, supplemented by debt, leads to disaster. This truth holds for personal finances, businesses, and government alike. Ignoring this reality is akin to claiming that pi isn’t the ratio of a circle’s circumference to its diameter or that water doesn’t boil at 212 degrees Fahrenheit—these are fundamental truths about how our world operates.
However, over the past 50 years, society has grown enamored with the illusion of debt. Time after time, more debt appeared to solve pressing issues. Investors and businesses thrived by leveraging debt, while politicians offered countless benefits to their constituents without immediate fiscal accountability. Each time, a growing economy seemed to provide a safety net.
By the time the financial crisis struck in 2008, the U.S. economy had reached its limit of tolerable debt, unable to sustain the burden it had accumulated. The economic landscape became stagnant.
The moment of truth has arrived. Poverty is rising, incomes are declining, businesses are struggling, and unemployment rates remain stubbornly high—with no viable political solutions in sight.
Welcome to the new normal after the reckoning.
Sincerely,
MN Gordon
for Economic Prism
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