This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
Here we are again. The drama. The finger pointing. The tension. The drama. Oh, the drama. Yes, the federal government must have maxed out its line of credit — again.
As much as the politicians would prefer to ignore it, the federal debt is slowly becoming a very big problem. Much like a frog that sits calmly in a pot while the water surrounding it ever-so-gradually rises to a boil, Americans remain stoic as Congress nonchalantly spends trillions of dollars and simply adds it to our tab.
The current credit limit for the federal government rests at $31,400,000,000,000 and was last increased on December 16, 2021. Last week we reached this milestone. Thanks to Congressionally-approved “extraordinary measures,” the U.S. Treasury will be able to keep sending out money until sometime this summer.
Our federal debt has two components – debt held by the public and intragovernmental holdings.
Debt held by the public is pretty self-explanatory. This $24,500,000,000,000 ($24.5 trillion) has been borrowed from other countries, entities, or individuals which require the payment of interest in cash. Last fiscal year, due to record low interest rates, total cash interest payments totaled a mere $475,000,000,000 ($475 billion) – or roughly 2%. If interest rates stabilize around the current 4%, you can imagine that we could be spending close to $1,000,000,000,000 ($1 trillion) every year just in interest costs.
Intragovernmental holdings are mostly comprised of trust funds for Social Security and Medicare. Essentially, the government collected the payroll taxes for these programs, spent the cash, and issued non-public debt to the trust funds. Both of these programs are currently spending more than they are taking in, so the government converts these intragovernmental holdings into debt held by the public as needed.
The neat thing about intragovernmental holdings is that we do not have to pay interest on that debt in cash. The government simply adds more non-public debt for interest.
Over the next 10 years it is likely that a vast majority of the current intragovernmental holdings will be converted to debt held by the public, potentially increasing our annual interest costs by an additional $250,000,000,000 ($250 billion) per year at current interest rates.
Despite the slowly rising budgetary stress of making interest-only payments on such a large debt, Congress permits the government to overspend its income annually which accumulates even more debt.
From April 2020 through March 2021, the government spent $4,000,000,000,000 ($4 trillion) more than it received. Fortunately, that spending spree declined to a modest overspend of $1,000,000,000,000 ($1 trillion) per year by July 2022, but the annual budget deficit started rising again from that point.
If we add a very conservative $15,000,000,000,000 of cumulative annual budget deficits to our debt over the next 10 years, our annual interest costs could be $1,850,000,000,000 ($1.85 trillion) every year a decade from now. This is far more than we currently spend on Social Security benefits alone each year. And we get nothing in return except happy bondholders.
Debt can be a fantastic tool for accomplishing long-term goals like buying a house or building a country’s infrastructure. Debt can also be a wildly dangerous tool whose dark side is not unveiled until it is too late for its victim to survive. There is no financial warning system in place to know when our government crosses this line.
Yes, the long-term financial flexibility of our country is slowly being suffocated by a building debt burden. The good news is that some sovereign debt victims can survive for decades or even centuries before collapse. The bad news is that the story of excessive debt historically does not end well for the debtor.
The next several months are sure to includes feisty headlines, dramatic threats, and plenty of political theater surrounding the debt limit increase. This drama could temporarily spread from the political realm to your portfolio as attention-span-challenged traders react to the show with applause or disdain.
The reality is that Congress is very likely to either increase or suspend the debt limit. It is very likely to be at the last minute (or very shortly thereafter) to maximize suspense. And everyone will likely be overjoyed that our Congressional heroes averted yet another self-created “national disaster.”
Now that I have given you the ending, feel free to tune out the debt limit show which is about to begin. I am pretty sure you will be much happier if you channel your time and energy toward more productive and positive endeavors.
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Quote of the week:
Cicero (55 BC): “The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt.”
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