America’s financial landscape has been severely impacted by soaring debt, mounting deficits, and escalating interest payments—issues that appear to be the result of years of irresponsible financial management. As decades of excessive spending catch up with the nation, we all face the repercussions.
The Treasury Department recently released its monthly treasury statement, detailing revenues and expenditures through September 2024. This monthly statement is particularly significant as it marks the final accounting for fiscal year 2024. After another year of wasteful spending, how did the numbers pan out?
For FY2024, the U.S. Treasury recorded revenues of $4.92 trillion but spent $6.75 trillion, creating a deficit of $1.83 trillion covered through additional borrowing.
The largest expenditure was unsurprisingly Social Security, costing $1.4 trillion. This was followed closely by health spending at $912 billion. Notably, net interest on the debt came in at $882 billion, surpassing both Medicare ($874 billion) and national defense ($874 billion).
Net interest payments soared in FY2024 due to rising interest rates. For context, net interest was $659 billion in FY2023 and just $475 billion in FY2022, signifying an increase of nearly 85 percent over the last two years.
The burden of these immense interest payments poses a significant challenge for Washington. As more of the budget is allocated to servicing debt, fewer resources remain for essential government services. At the current rate, net interest on the debt is projected to surpass Social Security as the largest outlay within three years.
Rack n’ Stack
The increasing interest payments exacerbate the deficit, which only adds to the total debt, creating a vicious cycle. Each new round of interest payments leads to even more borrowing, resulting in higher future payments—a continuous loop that spirals out of control.
This cycle explains the federal government’s $1.83 trillion deficit in FY2024. It also highlights why there is little expectation that Congress will take steps to curtail deficit spending in the coming years.
A rising debt burden coupled with escalating interest payments can create a precarious situation known as a debt death spiral. As more funds are required to cover these increasing payments, other necessary government programs may face cuts, leaving the government trapped in a financial corner.
Nonetheless, there remains time for Washington to employ creative tactics to stave off crisis. Rather than taking the difficult steps required to rectify the situation now, government officials call for looser lending terms, despite market conditions that do not support such moves. The Federal Reserve stands ready to comply.
The surge in interest payments has been a prime motivator behind the Federal Reserve’s recent decision to reduce the federal funds rate by 50 basis points after the September 18 FOMC meeting. While consumer price inflation has decreased compared to prior years, it still exceeds the Fed’s 2 percent target, and unemployment remains relatively low at 4.1 percent—conditions that hardly justify cheaper credit.
Unconventional Monetary Policy
The Federal Reserve’s objective in cutting rates was to reduce Treasury yields, allowing the government to finance its staggering $35.7 trillion debt more cheaply.
However, outcomes can be unpredictable. Since the Fed’s rate cuts, Treasury yields have actually risen instead of fallen.
Specifically, following the cuts on September 18, the yield on the 10-Year Treasury note jumped from 3.70 percent to approximately 4.20 percent. If the goal was to facilitate cheaper borrowing for the Treasury, it appears the Fed’s strategy has backfired.
It’s possible that Treasury yields may eventually respond to the Fed’s rate cuts in the coming months, but it is highly improbable they’ll return to the lows of July 2020, when the 10-Year Treasury yielded just 0.62 percent—a point marking a shift in the credit cycle. Expect interest rates to trend higher in the next three decades.
This indicates that the Fed will struggle to significantly lower financing costs for the Treasury through conventional monetary methods. So, how will it achieve this? The answer likely lies in a return to unconventional monetary strategies, particularly more quantitative easing (QE).
Recall that QE involves the Fed creating credit and using it to purchase Treasuries at rates lower than what the market would typically dictate. This type of aggressive intervention was seen after the 2008-09 financial crisis and again during the pandemic.
Dumb Reasons Why More QE Is Coming
In mid-2008, just before the collapse of Lehman Brothers, the Fed’s balance sheet stood around $900 billion. By mid-2022, it had ballooned to over $8.9 trillion. This increase represents about $8 trillion of newly created currency injected into the economy to support major banks and corporations.
Since then, through quantitative tightening, the Fed has shrunk its balance sheet to roughly $7 trillion. However, a return to the $900 billion mark seems unlikely.
If Treasury yields continue to rise, we can expect to see stress within financial markets—potentially dampening the stock market or impacting the already fragile residential real estate sector. There could also be an uptick in bank failures.
In any case, the Treasury remains tasked with financing a $35.7 trillion debt. With annual net interest payments nearing $1 trillion, some form of action is urgently required.
Lenders, wary of renewed inflation spikes, are increasingly demanding higher yields from the Treasury. As a result, financing this debt consumes an ever-larger portion of the budget. Hence, Washington is in dire need of lower interest rates.
This leads us to the necessity of more QE by the Fed. All that’s required is a recession or another crisis to justify a return to such measures, at which point the Fed would re-engage in creating credit from nothing and acquiring Treasuries, effectively driving down interest rates.
Past QE endeavors have fostered notable bubbles in stocks, real estate, and bonds, while also heralding high consumer price inflation and diminishing the dollar’s value.
The surge in gold prices over the past year—from $2,000 to over $2,700 per ounce—indicates that the Fed may soon embark on another misguided initiative, such as printing money to cover government debt interest.
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Sincerely,
MN Gordon
for Economic Prism
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