The conclusion of the U.S. government’s fiscal year for 2023 is just around the corner. Are you anticipating this moment?
You should be, especially if you value the stability of your dollar savings, investments, and the actions taken by Uncle Sam with your tax contributions.
Though the complete fiscal year statement won’t be unveiled until mid-October, it seems that the projected deficit for 2023 will be just shy of $2 trillion, nearly double that of the previous year.
What accounts for such a staggering deficit during a period characterized by low unemployment and economic growth? Has countercyclical stimulus spending officially become the norm for the U.S. government? What would occur if this deficit spending were to cease altogether?
This week, the Treasury published its spending report for the first 11 months of the fiscal year. During this timeframe, the federal government has generated $3.97 trillion in receipts while expending $5.49 trillion. Consequently, the cumulative deficit after 11 months exceeds $1.5 trillion.
Throughout the reported 11 months, only April and August exhibited surpluses. April’s surplus of $176 billion followed the influx of individual income tax payments, providing a fleeting moment of relief for the federal coffers. However, this did little to alleviate the overall situation. April’s surplus came on the heels of a $378 billion deficit in March and was succeeded by a $240 billion deficit in May. Thus, the anticipated boom from tax collections failed to significantly balance the Treasury’s deficits.
In August, the federal government managed to achieve an $89 billion surplus, attributed to a decline in outlays from the student loan program recorded in that month.
Without the influence of the $319 billion debt reversal of the student loan program, August would have seen a deficit of $230 billion. The Supreme Court’s decision to overturn President Biden’s student loan forgiveness plan played a key role in generating this rare monthly surplus.
Nonetheless, the overall fiscal situation remains grim, with year-to-date deficits overshadowing any surpluses by $1.5 trillion.
Rack and Stack
It’s important to remember that deficits add to the national debt. They accumulate month after month, year after year, stacking up like layers of waste at a landfill.
Currently, the total national debt stands at nearly $33 trillion, equating to over $98,000 per citizen. But that’s just the tip of the iceberg…
Unfunded liabilities, encompassing social security, Medicare Parts A, B, and D, as well as federal employee and veteran benefits, are currently estimated at nearly $194 trillion. Together, this totals over $577,000 for each citizen.
It’s evident that Washington’s spending is spiraling out of control. And the situation is likely to worsen. Here’s why…
One of the significant expenditure items in the Treasury report is net interest—the funds that the Treasury allocates to service the debt.
According to the Peter G. Peterson Foundation, the federal government shelled out $476 billion on net interest in fiscal year 2022. This figure marked a staggering 35 percent increase from $352 billion in 2021, representing the highest expenditure on interest ever recorded.
In the first 11 months of the 2023 fiscal year, net interest has already reached $630 billion. This total surpasses the previous record by $154 billion, and there’s still one month remaining in the fiscal year.
Moreover, net interest spending is nearly on par with other major expenditure categories. For instance, national defense and Medicare outlays for the first 11 months of the 2023 fiscal year stand at $736 billion and $730 billion, respectively.
Net interest spending is more than 2.4 times the $259 billion allocated for veterans’ benefits and services.
Net Interest Apocalypse
The largest expenditure category—social security—accounts for $1.24 trillion through the initial 11 months of the 2023 fiscal year, followed by $812 billion for health-related outlays.
Next comes national defense ($736 billion) and Medicare ($730 billion), along with $716 billion for income security programs, which include food assistance, disability, and unemployment benefits.
Collectively, these massive outlays contribute significantly to the mounting deficit.
While Congress technically retains the ability to constrain spending in these categories, it has demonstrated an inability to do so, even with a government shutdown looming at the end of the month.
Net interest expenses, however, have become largely beyond Congress’s control. Lawmakers have relinquished the ability to manage this spending category through long-standing practices of excessive borrowing.
Interest costs, which are currently rising sharply, are poised to soon eclipse all other federal budget categories, even surpassing social security.
The primary driver behind this impending “net interest apocalypse” is the combination of rising interest rates and the unprecedented amount of debt that the Treasury will need to refinance at higher rates over the next 12 months.
Torsten Slok, chief economist at Apollo, recently noted that an astounding $7.6 trillion of publicly held U.S. government debt will mature in the coming year. The yield on the 2-year Treasury note currently sits around 5 percent, compared to just 0.14 percent a mere three years ago.
Do you recognize the impending crisis?
Anyone with even a basic understanding of economics anticipated that the historically low interest rates of 2020 and 2021 would not persist. Homebuyers, for instance, capitalized on these rates to secure 30-year fixed-rate mortgages at just 2.65 percent, while current rates exceed 7.5 percent.
Regrettably, the decision-makers at the Treasury missed a golden opportunity during 2020. They could have locked in interest rates for existing debt for the next 30 years when 30-year Treasury bonds were yielding less than 1.5 percent.
Instead, mirroring the choices made by homebuyers in the early 2000s, the Treasury opted for short-term teaser rates. Consequently, with the necessity of rolling over $7.6 trillion of debt at significantly higher rates, U.S. taxpayers now face what can only be described as an Adjustable-Rate Mortgage (ARM) on government debt.
ARMed and Dangerous at the U.S. Treasury
When ARMs reset in 2008, numerous individuals who were lured by attractive teaser rates found themselves unable to meet their mortgage obligations, ultimately losing their homes.
The Treasury, in contrast, has the unwavering support of U.S. taxpayers backing its reckless choices. This situation implies that as interest rates on government debt rise, taxpayers—yourself included—will increasingly be working primarily to cover net interest payments.
Furthermore, as the Treasury refines its $7.6 trillion of debt over the forthcoming year, interest rates are likely to escalate even further, dependent on the willingness of buyers to purchase the debt and the terms they demand.
Currently, the Federal Reserve can no longer be counted on to buy this debt and suppress interest rates artificially, as it has done previously. In fact, the Fed is actively reducing its Treasury holdings by approximately $60 billion per month.
Similarly, commercial banks are allowing their Treasuries to mature in order to free up cash to counter deposit withdrawals. No one is eager to repeat the fate of the now-defunct Silicon Valley Bank.
What interest rate is necessary for Treasuries to transition from being risk-free rewards to simply reward-free risks?
If the latest consumer price index report offers any indication, Treasury yields are set to rise. The most recent CPI reading indicated that consumer prices rose at an annual rate of 3.7 percent in August.
Remember, inflation begins with the expansion of the money supply. On the monetary policy front, the Fed is finally contracting its balance sheet after a decade of excessive expansion. Conversely, Washington continues to engage in expansive fiscal policies that fuel inflation through deficit spending.
The need for significant spending cuts was evident several decades ago. Regrettably, the repercussions of reckless borrowing and spending practices continue to unravel.
As net interest claims an increasing share of the budget, the situation is fast descending into chaos.
The day is approaching, likely sooner than anticipated, when the Fed will find itself once more compelled to purchase Treasuries. But contrary to previous rounds of quantitative easing, a larger portion of newly printed money will go toward servicing net interest payments.
Relying on printing money to cover interest on government debt signals extraordinary government failure. Remember those accountable for these decisions.
[Editor’s note: Are there hidden provocations by the Pentagon towards China regarding Taiwan? Are your finances prepared for such potential chaos? Answers to these pressing questions can be found in a one-of-a-kind Special Report. You can access it here for less than a penny.]
Sincerely,
MN Gordon
for Economic Prism
Return from ARMed and Dangerous at the U.S. Treasury to Economic Prism
