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On 1 February, the U.S. national debt soared past $30 trillion for the first time, as inflation raged at 7 percent last month and the U.S. Federal Reserve prepared to raise interest rates.
The economy reached the milestone earlier than the expected date of late 2025, due to the federal government’s $5 trillion of extra spending to artificially boost up the economy during the COVID War, pumping in cheap money that was borrowed to pay stipends to families, make grants and loans to businesses, and cover extra health care costs.
Last year, also for the first time, the value of the federal government’s debt exceeded the country’s annual economic output.
“Hitting the $30-trillion mark is clearly an important milestone in our dangerous fiscal trajectory,” CEO Michael Peterson of the Peter G. Peterson Foundation, told The New York Times.
The foundation advocates for balanced budgets and reductions in public spending.
“For many years before COVID, America had an unsustainable structural fiscal path because the programs we’ve designed are not sufficiently funded by the revenue we take in,” he said.
TRENDPOST: Democrats in Congress have always prioritized spending over balanced budgets. President Joe Biden’s $1.9-trillion American Rescue Plan, passed last year, was affordable because interest rates were so low, Treasury Secretary Janet Yellen told Congress.
But now the Treasury Secretary, who was the former Fed Head, has not mentioned a peep about the debt not being affordable because interest rates are so high!
Therefore, with rates set to rise, it totally invalidates Ms. Yellen’s contention.
TREND FORECAST: Most market-watchers are forecasting four or five rate boosts this year, putting a key Fed rate to 1 or 1.25 percent before next year. And as we have forecast, should rates spike to the 1.5 percent, 2 percent range, it will sink the nation into recession.
The Government Game
The Fed also has kept interest rates low by buying bonds at artificially low interest rates, a practice it will likely end next month and will begin selling off the bonds it holds.
In his 2016 presidential campaign, Donald Trump promised to balance the federal budget. Instead, in a 2017 party-line vote, Republicans cut federal tax revenues by $1.5 trillion, sending the annual deficit over $1 trillion for the first time, even before the COVID virus arrived.
And as we have reported, according to the Tax Policy Center, the one percent got 82 percent of the tax-cut benefits. And rather than the money that enriched corporations being invested back into their businesses, which was the line being sold by Trump, they instead spent nearly a trillion dollars in stock buy-backs.
Double Talk
While President Joe Biden and Democrats in Congress proposed trillions in new spending last year, Republicans staged a protest about raising the nation’s debt ceiling to pay bills that came due under budgets Republicans previously voted for, risking a first-ever federal default.
Finally, in December both parties passed a bill that raised the debt ceiling to $31.4 trillion.
Rising interest rates and growing health care spending for an aging population heighten the risk of a “fiscal crisis” and loss of confidence in the U.S. dollar, the nonpartisan Congressional Budget Office (CBO) warned last year.
If interest rates rise in the way the CBO expects, the government’s interest payments will consume 8.6 percent of GDP by 2051, about $60 trillion between now and then, the agency has said.
Interest on 10-year treasury notes will rise from 1.6 percent now to 4.9 percent in 2050, according to a recent study by the conservative Manhattan Institute think tank.
If rates add just one additional point, that would cost an additional $30 trillion in interest over that period, the study concluded.
Interest on the public debt soon could be the fastest-growing segment of the federal budget, the NYT noted.
TREND FORECAST: As we noted in “National Debt Highest in 75 Years” (9 Sep 2020) and “Governments Can Pile Up Higher Debt, IMF Says” (2 Feb 2021), endless debt is a ticking bomb. Again, hardly a peep from the business media and government “officials,” that the higher interest rates rise, the more it will cost to service the debt.
The more the world lives on debt, the greater the risk that a single catastrophe could collapse the global economy. However, politicians will not behave with fiscal responsibility until an inescapable crisis forces them to.
Meanwhile, gold, silver, and key industrial metals such as lithium will remain safe stores of value.