Those $1,400 stimulus checks sent by the feds brought people some smiles. The checks accounted for about $410 billion of the entire $1.9 trillion stimulus, according to the Wall Street Journal. After all this federal largesse, our national debt sits at around $28 trillion.
A lot of political agendas are pushed with exaggerations to drive fear and support. I often dispute these alarmist narratives. They regularly fall apart under scrutiny, and when combined with fear, misinformation leads to ineffective responses.
When it comes to the national debt, however, we are not alarmed enough. I say this without a speck of hyperbole — the national debt quite literally poses an existential threat to this nation and has the potential to trigger a global economic crisis.
Many people think there will just come a point when the U.S. can no longer borrow more money, and we’ll be forced to live within our means. An era of fiscal responsibility may arise from the coming crisis, but what precedes that point is quite troubling.
The primary mechanism by which the U.S. government borrows money is selling bonds at auction. Until recently, the demand has been quite high for these investments, which makes a lot of sense considering our nation has the largest economy in the world, a historically stable government, and an unmatched military might. It was a good bet we’d make good on our obligations.
No matter how much power you wield, however, no one borrows for free. For a long time, the U.S. has borrowed money at very low interest rates, and there was some rational thought behind the feds borrowing money cheaply to invest it in an economy that produces at a higher rate of return. The problem is these low rates won’t last forever.
We’re starting to see the tide turning. The government held a few auctions recently for billions in new debt. According to the market experts quoted in the Financial Times, the characterization of the weak demand seen at these auctions ranged from “tepid” to “a disaster.” This troubling event won’t make headlines, but as the most indebted organization in human history, it’s a signal that things are about to get really bad for us.
One of the reasons that bond investors are shying away from the U.S. bond market is the fear of inflation. If you borrow a dollar at 2% interest when there’s no inflation, you can turn a profit. If you borrow the dollar at 2% and inflation is 5%, you’re losing money. As the dollar loses value, investors aren’t going to be interested in lending us money at low rates.
President Joe Biden’s $1.9 trillion stimulus is in addition to a $900 billion package passed in December, a $953 billion allocation for the Paycheck Protection Program in July, and the $2.2 trillion CARES Act — all of which comes after the Barack Obama stimulus era. Biden is now proposing a $2.2 trillion infrastructure package.
The feds expect to collect about $3.8 trillion in taxes this year. Medicare and Social Security will eat up about $2 trillion of that alone. Add to that our massive military budget, and there isn’t a whole lot left over.
The U.S. was running large deficits every year, even before we had a global pandemic shut down a huge chunk of our economy. Currently, at the low rates we’ve enjoyed, we’ve been able to juggle our deficits and the interest on our debt, which accounts for around 11% of all federal spending. If those interest rates climb back up to their historic averages, we’d add new spending obligations to our federal budget that would equal about half of all federal tax revenue. It is conceivable that rates could rise so high that it eats up all of federal tax revenue, which would be absolutely catastrophic.
At that point, we couldn’t just contemplate cutting some farm subsidies, closing military bases in foreign countries or cutting funding for studies into the mating habits of a flea in Arkansas. We’d have to discuss whether seniors get their Social Security benefits or letting national security lapse. Paying interest on the national debt is not really optional. If we default, the entire U.S. economy would collapse, and that would set off a global economic crisis.
What really concerns me about this scenario is what happened during the pandemic. Many people could deal with the crisis by ordering take out and watching Netflix. Despite that comparably tolerable situation, the political climate in America descended into chaos, and radicalized mobs roamed the streets in major cities. What would happen if millions were faced with the desperation of not having enough to eat or any place to live? Imagine how appealing voices of extremism would be, especially to young people, who would face real poverty for the first time in their lives.
In the interest of avoiding hyperbole, it’s worth noting we might pull through this crisis. Canada faced a debt crisis in the 1990s, from which it emerged, and Argentina is facing one now. Neither nation collapsed into unstable war zones. Nonetheless, these crises can be seen years before they happen using simple math, and failing that, there is a whole lot of pain to get back to financial stability. It doesn’t appear America will avoid the completely avoidable. I only hope we deal more wisely with what comes after.