During the 14 years that the U.S. Federal Reserve held interest rates low, the U.S. government borrowed freely to haul the economy out of the Great Recession, continue to fight the Afghan war, and bail out businesses and consumers during the COVID War.

“Low-interest rates and Fed bond-buying masked the strain” on the economy of all that debt, The Wall Street Journal noted in a 14 August commentary. “Interest rate costs were recently no higher than in the 1990s as a share of federal spending.”

“But the treasury barely seized the opportunity to lock in rock-bottom rates by issuing more long-term notes and bonds. Now it is too late.”

The U.S. national debt will surpass GDP this year, according to the Congressional Budget Office (CBO). Perhaps more shocking, interest on that debt will eat up three-quarters of the government’s discretionary funds. Social Security and Medicare costs are legally obligated and military spending is politically untouchable, the WSJ noted.

“Yet the CBO’s forecast actually looks too optimistic,” the WSJ pointed out.

The reason: the CBO’s projection assumes interest rates will be around 3 percent. However, treasury securities are now carrying close to 5 percent interest.

“Say you added just one percentage point to the average interest rate in the CBO’s forecast and kept every other number unchanged,” the WSJ said. “That would result in an additional $3.5 trillion in federal debt by 2033. 

“The government’s annual interest bill would then be about $2 trillion. For perspective, individual income taxes are set to bring in only $2.5 trillion this year.”

Having the world’s reserve currency and high interest rates would attract foreign investment into U.S. government securities but that would not permanently defuse the debt bomb, the WSJ wrote. Also, those same high rates would crash the stock and housing markets.

“An America with tight purse strings” would be less able to conduct cutting-edge medical research, bail out its banks, or subsidize emerging technologies,” the commentary said, adding that such an America would be one “with a more volatile economy, diminished international prestige and, ultimately, less attractive assets.”

TREND FORECAST: Politicians will not act to raise taxes or cut spending—especially on entitlement programs or the military—until faced with an inescapable crisis such as the Great Recession or if U.S. debt became too risky for other countries to invest in. 

The only alternative is to create a massive public constituency around raising taxes and cutting spending, the formula that balanced the federal budget in the 1990s.