President Biden recently proposed a $6 trillion budget that contains the highest levels of government spending since World War II and will maintain an average federal deficit of more than $1.3 trillion a year over the next decade. This is on top of the $1.9 trillion coronavirus relief package signed back in March. Everyone loves government spending,
but is this kind of largess sustainable?
Covid-19 decimated the economy in the first quarter of 2020 when businesses, schools and government offices were shut down to contain the virus. A wave of trillion-dollar federal deficit spending ensued to help American individuals and businesses in financial need. Today, as Covid infection rates drop and life begins to feel almost normal again, President Biden has kept the money spigot open with his proposed budget.
With all this money sloshing around here are two questions the federal government doesn’t want to address: Can the federal budget continue to run trillion-dollar deficits indefinitely and how will all this borrowed money to finance deficits get paid back?
The answer to the first question posed is a resounding no. It’s just simple math. The Congressional Budget Office projects a 2021 deficit of $2.3 trillion and by 2030 a national debt of more than $40 trillion. To think interest rates will stay at historic lows to finance all this spending is foolhardy.
Over the last 50 years the average interest rate, from short-term notes to 30-year bonds, was 5.52 percent. If the current national debt had to be serviced using the historic average 50-year interest rate, then annual debt service would be about $1.5 trillion a year or about 40 0ercent of all federal government income. In 2020, $345 billion was paid in debt service at today’s exceedingly low-interest rates, which are about 4 percent lower than the 50-year average.
What the federal budget also doesn’t properly account for are future payouts for natural disaster relief, possible armed conflict and an extension of the Covid-19 pandemic. Any of these potential problems could easily cost taxpayers an additional trillion dollars a year.
The second question raised here is how will these gigantic deficits ever get paid back? The honest response is they won’t. There’s a non-partisan bias to keep deficit spending going because elected officials prefer to give money away than take it back from voters.
In 2021 Social Security will be the largest non-discretionary federal expense, budgeted at $1.151 trillion. It’s followed by Medicare at $722 billion and Medicaid at $448 billion. The Department of Defense is also slated to spend $636.4 billion this year. Vocally calling for cuts in any of these areas is political suicide, so there is little chance in the near future there will be any budget cuts to lower the deficit.
At some point, whether through additional interest payments that must be paid on the national debt as interest rates rise, or an endless printing of U.S. currency to finance deficit spending, the world will lose faith in the dollar and it will end badly.
Ernest Hemingway’s answer to the question from his classic novel “The Sun Also Rises” on how you go bankrupt also applies to the federal government: “Gradually, then suddenly.”