Understanding The Fundamentals of The National Debt

Now exceeding $34 trillion, its interplay with interest payments and inflation is crucial for grasping the broader health of the economy. As the national debt balloons, so do the costs of servicing it, especially in a climate of rising interest rates. These interest payments consume a significant portion of the government's budget, diverting resources away from critical investments in infrastructure, education, and healthcare. Moreover, the government's need to borrow more to cover these costs can lead to increased bond issuance, potentially crowding out private investment and dampening economic growth.

The ripple effects of high national debt are intimately linked with inflation. In efforts to manage or reduce the debt burden, governments might resort to strategies like increasing money supply, which can devalue the currency and trigger inflation. This inflation erodes the purchasing power of consumers, disproportionately affecting lower-income households. It also complicates monetary policy, as central banks face the challenging task of balancing interest rate hikes to control inflation without exacerbating the cost of debt servicing. This delicate balance is key to maintaining economic stability and preventing cycles of debt and inflation from spiraling out of control.

A comprehensive understanding of these economic mechanisms is vital not just for policymakers, but also for investors, businesses, and the general public. It enables informed decision-making and fosters a more robust dialogue on fiscal policy and its long-term implications. For investors and businesses, it shapes strategies around borrowing, lending, and investment. For the average citizen, it impacts everything from employment opportunities to retirement savings. As such, an informed perspective on national debt, interest costs, and inflation is fundamental to navigating the economic landscape effectively.

A tsunami of Treasury securities has been issued to cover the staggering government deficits, and as a result, the rising US federal debt is just over $34 trillion, up from $33 trillion in mid-September and up from $32 trillion in mid-June.

However, early in 2021, there was a large spike in inflation, prompting the Fed to raise policy rates to 5.5% at the top end and remove $1.1 trillion from its balance sheet through the QT program, which raised long-term rates. Thus, the interest rates that the Treasury Department must pay have increased in order for it to be able to sell these massive amounts of Treasury securities each week. T-bills are now selling at yields of 5.5%, while longer-term securities are selling at yields between 4.3% and 4.7%, up from over 5% a month ago.

According to figures from the Treasury Department, the average interest rate that the government is paying on all of its interest-bearing debt has been growing from the historic low of 1.57% in February 2022 to 3.05% in October. A large portion of this debt was issued years ago with significantly lower coupon interest rates than they are now.

FED Governor Bowman Expects More Rate Hikes

Federal Reserve Governor Michelle Bowman has just expressed that she expects the central bank will have to hike rates further to bring inflation down to its two percent target.

In a speech to bankers and businesspeople in Salt Lake City, Utah, Bowman stated, "My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2% target in a timely way. Monetary policy, however, is not set in stone, and I will keep a close eye on the coming data as I evaluate its implications for the economic outlook and the proper course of monetary policy."

Bowman stated in her address that there were "several uncertainties" around her baseline prognosis, such as whether supply chain improvement will continue to be an economic deflationary factor and whether the labor force will continue to grow. She also cautioned that rising service demand would exacerbate inflationary pressures.

According to Bowman, "should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way, I remain willing to support raising the federal funds rate at a future meeting." - Breitbart

Kicking the Can Down the Road: The National Debt Dilemma

In the realm of fiscal policy, the phrase "kicking the can down the road" has become a popular metaphor for the approach often taken by governments, particularly in dealing with national debt. This idiom paints a vivid picture of procrastination and short-term solutions, a scenario where pressing issues, like mounting national debt, are perpetually postponed rather than decisively addressed.

The Immediate Gratification Trap

In the context of national debt, "kicking the can" implies that the government opts for temporary fixes or delays difficult decisions to avoid immediate discomfort or political unpopularity. This approach often involves increasing borrowing to fund current expenditures rather than implementing austerity measures or increasing taxes. While this strategy can provide immediate economic relief and maintain public services, it does so at the cost of increasing the debt burden for future generations.

Long-Term Implications

The long-term implications of consistently deferring the handling of national debt are significant. As debt accumulates, the interest payments alone can become a substantial part of government spending, diverting funds from essential services like healthcare, education, and infrastructure. Furthermore, high levels of debt can lead to decreased investor confidence, higher borrowing costs, and in extreme cases, a fiscal crisis.

The Inflation Connection

In an environment of high inflation, like the one many are currently experiencing, the national debt problem becomes even more complex. On one hand, inflation can reduce the real value of debt, making it easier to manage. However, this comes at the cost of increased living expenses for the public and potential destabilization of the economy. Additionally, to combat inflation, central banks may raise interest rates, which can increase the cost of servicing the national debt.

A Balancing Act

Addressing national debt requires a delicate balance between fiscal responsibility and economic growth. Aggressive measures to reduce debt might involve spending cuts or tax increases, but these can slow economic growth and impact public welfare. On the other hand, unchecked borrowing can lead to unsustainable debt levels and long-term economic instability.

The metaphor of "kicking the can down the road" in relation to national debt highlights a critical challenge. It underscores the need for a forward-looking approach in fiscal policy, one that considers the long-term health of the economy and the well-being of future generations. Effective management of national debt demands a blend of prudent spending, responsible borrowing, and policies aimed at sustainable economic growth. This path is not just about balancing books, but about securing a stable and prosperous future.