The Mother of All Debt Bombs is Approaching

America is facing formidable challenges as we approach the midterm elections when voters can exercise their choice to make a course correction in current leadership and the direction of the country.

Rasmussen Reports provides a current snapshot of public opinion regarding the state of America. In a survey from several weeks ago, they found that only 29% of likely US voters think the country is heading in the right direction, barely a quarter of voters. In contrast, 64% say we are headed in the wrong direction.

As President Bill Clinton’s consigliere James Carville quipped during one of Clinton’s presidential campaigns, “It’s the economy stupid”. Flash forward 30 years, and the economy is still an important issue as Rasmussen Reports found in a recent survey, that 57% of American adults believe it’s likely that, in the next few years, the US will enter a 1930s like depression.

One big reason for such pessimism is the time bomb of the national debt lurking, not at some point in the future, but here and now. The U.S. national debt is now over $31 trillion, and rapidly rising as the federal government spends more than it takes in, borrowing money to pay the growing shortfall.

Under President George W. Bush, the national debt doubled, from $5 trillion to $10 trillion. President Barack Obama said, “hold my beer” and doubled it again under his eight-year tenure, from $10 trillion to $20 trillion. Under President Donald Trump, the debt still crept upwards, but COVID pushed it into the stratosphere. President Joe Biden has kept his foot on the accelerator and now the debt stands at $31 trillion.

Today we have double-digit inflation, depending on how it is calculated, forcing the U.S. Federal Reserve to raise interest rates to slow the inflation inferno. As Investopedia reported,

With inflation at its highest rate in decades, the U.S. Federal Reserve has repeatedly increased benchmark interest rates in recent months. As of October 2022, the federal funds rate ranged from 3% to 3.25%, compared with close to 0% early in the COVID-19 pandemic. While the rate is already the highest since 2008, analysts expect the Fed to keep pushing it up this year.

Time for some simple arithmetic. With a national debt north of $31 trillion, each percent in the federal funds rate translates into over $300 billion in annual interest payments on the national debt.

Suppose the Fed raises interest rates to 4% to tame inflation. That is a low estimate as the, “Well-respected Taylor rule recommends that interest rates rise one-and-a-half times as much as inflation.” Accepting the government inflation rate as just over 8%, this rule suggests interest rates need to be at 12% to stop inflation.

Twelve-percent interest on a $31 trillion debt is $3.7 trillion per year. The federal government is expected to spend $5.9 trillion in 2022, meaning the interest on the debt would be 63% of total government expenditures. That’s to stop inflation. What about just keeping up with current Fed rate hikes?

If the Fed only increases rates to 4%, interest on the national debt would be over $1.2 trillion per year. This is compared to only $300 billion on debt service in 2021. But that is still 20% of the federal budget and climbing as there is no political appetite for cutting entitlements or other promised spending. Raising income tax rates won’t be enough to raise this kind of revenue, and hiking taxes during a recession will only make this whole mess much worse.

The government could certainly print money to cover the debt service, but that would worsen the inflation they are trying to fight. That would be like a consumer maxing out their credit cards, unable to make more than the minimum monthly payment, and asking for a credit increase so they can keep spending, going further into debt. That is exactly where America is headed.

There are no good solutions here other than the tough and painful high interest rates and recession that we went through in the early Reagan years to end the Carter era stagflation. Only now the debt is far larger. It was less than a trillion when Reagan was elected in 1980. Now it is 30 times higher, meaning much greater debt service.

The Fed has been printing money through “quantitative easing” for over a decade and the chickens are coming home to roost for this massive printing of easy money. Was this incompetence on the part of the Fed, made up of supposedly smart economists? Or was this a deliberate scheme to eventually crash the economy and destroy the middle class?

Ideas like cutting government spending and lowering tax rates to grow the economy are lost on the Biden administration, which is hell bent on doing the exact opposite, continuing to spend money it doesn’t have on Ukraine, renewable energy, and student loan forgiveness. The Fed’s only option now is to fight inflation by creating more inflation. Only in Washington, D.C., does this pass for logic.

The current trajectory is to double down on fiscal insanity. As the saying goes, “when in a hole, stop digging”. The current administration is not only continuing to dig but is also bringing in the big earth movers to dig a much deeper hole. This will not end well for America or the world as the mother of all debt bombs is soon due to explode.

Brian C Joondeph, MD, is a physician and writer.

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