At our current rate of spending, the U.S. will be unable to confront major problems in the future because we’ve already stretched ourselves too thin.
MARCH 4, 2021
America’s debt and deficits usually are spoken of in terms of economics, but they have huge implications for national security. To see why, start with the economics angle.
Famed investor Michael Burry — who foresaw the housing market bust and was played by Christian Bale in the hit film “The Big Short” — has just issued a warning. In a series of tweets, Burry said that the stock market could crash because of too much debt.
Burry also fears inflation could become uncontrollable, based on a sharp year-over-year increase in data that tracks retail sales and money supply, coupled with unprecedented federal budget deficits and bond-buying by the Federal Reserve, known as quantitative easing. Indeed, retail sales are up year-over-year due to unprecedented stimulus from Washington.
Burry’s warnings might seem conflicting to some. How could there be both a higher risk of deflationary bust and out-of-control prices? The answer is that the further we go in the land of debt and deficits — which doesn’t just exist for the government, as corporations also have high debt levels relative to GDP — the greater the risk of macroeconomic shocks that cause untold pain for normal Americans.
Debt is unstable, and acts as a deflationary force in times of crisis. Think of it this way: all else equal, if you run up the credit card, that reduces your ability to spend in the future. If corporations or households take on too much debt, this drags on future demand.
Many point out that the U.S. government can’t go bankrupt because it can print money to repay the debt, but risks remain. Right now, the United States isn’t at risk of hyperinflation. Much of the “printed” money due to quantitative easing sits in banks’ excess reserve accounts at the Federal Reserve. This money doesn’t hit the real economy, which is part of the problem, because it arguably pushes up asset prices and increases inequality without ever hitting Main Street.
But Burry has a point. Once the money printing starts directly financing government deficits, inflation could get uncomfortable. We don’t have that now, but it isn’t hard to look ahead and imagine a scenario where politicians are unwilling to cut spending or raise taxes, and they cajole the Fed into directly supporting their outsized spending habits.
This situation threatens U.S. national security. Right now, the U.S. national debt to GDP is about 100 percent, reaching World War II levels but without the world war. Some might claim coronavirus is like a war, but it isn’t remotely comparable to World War II (which killed 75 million people) and our debt situation was on this trajectory well before the coronavirus hit. One risk is that the United States will be unable to confront major problems in the future because we’ve already stretched ourselves too thin.
If Treasury yields continue to rise over the longer term, an unsustainable U.S. budget situation becomes downright scary. Estimates say that by the end of the decade, we’ll be spending more to pay interest on our national debt than on our defense budget.
Yet these estimates assume 10-year Treasury yields remain relatively low, and don’t budge substantially above 3 percent. If the government starts paying more for the cost of debt, those interest costs could skyrocket. Also, as we are witnessing in real-time (outside of Congressional Budget Office estimates), Treasury yields tend to move quickly. If inflation takes off, it wouldn’t be unsurprising to have a 10-year Treasury yield at well above 3 percent.
At that point, Americans will have to make hard and painful choices. A dysfunctional Washington might not be able to dig out of this mess as it should, by raising taxes and cutting spending. This means Americans need to start thinking about how to get our fiscal house in order before a potential crisis hits.
Deficits will have to be trimmed, but not all deficits are created equal. Deficit spending that goes to households who need help in a downturn is different than deficit spending that goes toward endless wars. Washington politicians are quick to phrase wasteful spending in terms of small discretionary items or special interest tax giveaways, which are due for belt-tightening, but there are much larger examples of waste that few talk about.
War overseas has cost American taxpayers more than $5 trillion since 2001. We spend about $40 billion in Afghanistan every year, which excludes some of the longer-term costs of the war, and billions more protecting wealthy Germany and South Korea. The United States spends $50 billion on foreign aid every year, often as a subsidy for defense contractors, because the money is earmarked to allow the foreign countries to buy U.S. military wares.
This spending is of dubious value. A clear candidate for reform is the amount of money we spend overseas, which stems from our overstretched military position, especially in the Middle East. A simple solution is to start paring back this unnecessary military position and spending. Eventually, Americans may be asked to make sacrifices. Before then, Washington special interests and foreign policy adventurism must make sacrifices also.
Willis Krumholz is a writer for The Federalist who lives in Minnesota. You can follow Willis on Twitter @WillKrumholz.