Commentary
Let’s get one thing off the table. Putting aside the Biden administration’s fear-mongering, the U.S. government won’t substantively default on its debt in June 2023. The game of high-stakes chicken being played right now with congressional leadership will resolve before it’s too late. In brief, the administration and Democrat leadership want to raise the debt ceiling, no questions asked. Republican leadership insists, not unreasonably, that there must be spending cuts. The question is, who blinks first? Given the alternative is financial markets Armageddon, a compromise will be reached. So everything is fine. Right?
And yet, this is a critical debate. Financial markets order, economic growth, employment levels, and price stability all hang in the balance. What are the issues at play? Why does it matter whether the debt ceiling is raised and under what terms?
First, a few inconvenient facts. Since 2001 (the most recent budget surplus), the U.S. federal government has accumulated a budget
deficit of more than $20.7 trillion. That’s right. For every dollar of the $31 trillion of total federal debt, two-thirds of it has been used to finance the spending deficit of the past 20 years. This, in turn, has come from three main categories of expenditures: the endless wars in Afghanistan, Iraq, Syria, and Libya (costing more than $8 trillion, according to some
estimates); expansion of government programs during the global financial crisis (GFC) of 2007–09; and “pandemic relief,” i.e., government handouts during the COVID-19 experiment of 2020–21. Indeed, of the $20.7 trillion cumulative deficit, $6 trillion was accrued in just two years of lockdowns, stymie checks, abuse of emergency powers, ineffective paper mask-wearing, and dangerous vaccine mandates. The perceived wealth effect of those years was a debt-enabled total fabrication, and we’re paying for it now.
We’re on the verge of a debt- and deficit-fueled inflationary crisis, one in which our trading and investment counterparties lose all faith and confidence in our government and our currency and price stability goes out the window.
As economist Peter Bernholz demonstrated in painstaking detail in his book “
Monetary Regimes and Inflation,” all recorded high and hyper inflations are linked to unsustainable budget deficits. When the government prints money to pay for its deficit spending, as the United States has done for years now, inflation is sure to follow, albeit often at a lag of several years. Initially, runaway deficit spending can be economically stimulative, as we saw last year, but if moderate inflation turns into high inflation, the economy will slow dramatically. When an economy experiences inflation, wages usually fail to keep up with price growth, and then, eventually, economic slowdown results in recession and mass layoffs. These are high stakes indeed.
During the GFC, it was individuals and households, not the government, that had too much debt. When the U.S. housing market crashed nationwide, millions of underwater borrowers defaulted on their mortgages. More than 3 million homeowners received foreclosure
notices in 2008 alone. According to
data from the Federal Reserve, U.S. households held an aggregate $14.5 trillion in debt in 2008, more than the total U.S. Gross Domestic Product (GDP). At that time, debt service
payments made up more than 13 percent of personal disposable income.
While total household debt had increased to $19 trillion by the end of 2022, the
ratio of household debt to GDP had fallen to below 77 percent, and debt service payments represented 9.7 percent of disposable income. This is in line with normal ranges seen since the data were first collected in 1980. However, these household debt levels are still too high and are ultimately unsustainable if rates continue to rise. Even still, households don’t represent the worst of it.
Today, it’s the U.S. federal government—not households—that’s most overindebted and poses the greatest risk of destabilizing the U.S. financial system and its economy. During 2008, the national
debt was $10 trillion—decried at the time as being astronomically high—and represented 77 percent of GDP. Fast forward to 2023, and the
figures have tripled: $31 trillion of federal debt, which equates to more than 120 percent of GDP. That’s only the federal government. Tack on the
debt of the states and local municipalities, and total government debt to GDP is 132.3 percent.
When all U.S. household, corporate, and government debt is summed, the total represents a whopping 257.3 percent of GDP. This is a higher ratio than during the GFC, when total indebtedness was 242.4 percent of GDP. Things have gotten worse, not better. In the absence of a dramatic turnaround, this won’t end well.
By including only the national debt, the United States is the fifth most
indebted—relative to GDP—of any large country in the world (seventh if Lebanon and Cabo Verde, wherever that is, are included). On the same basis, Russia’s public debt is only 12 percent of GDP, and China’s is 62 percent. That doesn’t sound like a good starting point for increasing geopolitical tensions with such rivals.
While household debt service costs are—for the moment—manageable, the debt service costs of the U.S. government are skyrocketing. The Federal government
spent $475 billion—nearly 10 percent of its entire budget—on debt service in 2022. This annual figure is
expected to rise to more than $800 billion in 2023 as both absolute debt levels and interest rates have increased from 2022. This isn’t sustainable.
There’s only one cure. The U.S. government must cut spending. Substantially. We must curtail entitlement programs. Ceaseless money printing must be stopped. The Keynesians must be defenestrated. The United States must stop burning money in ongoing support of the military-industrial complex’s endless wars, today focused on Ukraine, tomorrow somewhere else, never mind where or what for.
These demands are nearly impossible politically. Nonetheless, congressional leadership must hold the line.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
