Tags: interest | government | debt | military | ny times

NY Times: US to Spend More on Government-Debt Interest Than on Military

USA shaped map out of American flag with debt written in white letters on black Prison Dungeon Ball and chain
(Eduardo Huelin/Dreamstime)

By    |   Wednesday, 26 September 2018 11:06 AM

The federal government reportedly could soon pay more in interest on its debt than it spends on the military, Medicaid or children’s programs.

More than $900 billion in interest payments will be due annually within the next 10 years, far outpacing spending on other government programs, the New York Times reported. 

The cost of interest is poised to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office.

“It’s very much something to worry about,” C. Eugene Steuerle, a fellow at the Urban Institute and a co-founder of the Urban-Brookings Tax Policy Center in Washington, told the Times. “Everything else is getting squeezed.”

The deficit is expected to total nearly $1 trillion next year — the first time it has been that big since 2012, while annual interest payments on the national debt are expected to triple over the next decade, according to the Congressional Budget Office. 

The combination, economists told the Times, marks a journey into mostly uncharted financial territory.

In the past, government borrowing expanded during recessions and waned in recoveries. The deficit is soaring now as the economy booms, meaning the risk is that the government would have less room to maneuver if the economy slows.

Aside from wartime or a deep downturn like the 1930s or 2008-9, “this sort of aggressive fiscal stimulus is unprecedented in U.S. history,” said Jeffrey Frankel, an economist at Harvard.

Frankel warns that when the economy weakens, the government will find it more difficult to cut taxes or increase spending.

Lawmakers might, in fact, feel compelled to cut spending as tax revenue falls, further depressing the economy. “There will eventually be another recession, and this increases the chances we will have to slam on the brakes when the car is already going too slowly,” Frankel told the Times.

To be sure, the surging national debt sparks warnings on seemingly a daily basis.

Billionaire hedge fund manager Ray Dalio predicted the U.S. economy is about two years from a downturn, which will see the dollar plunge as the government prints money to fund a swelling deficit.

As the impact of President Donald Trump’s tax cuts starts to fade about 18 months from now, the combination of rising interest rates and mounting costs from pension and healthcare obligations will put pressure on the budget, Dalio, the founder of Bridgewater Associates, told Bloomberg Television.

"We have to sell a lot of Treasury bonds, and we as Americans will not be able to buy all those treasury bonds," he recently told Bloomberg. "The Federal Reserve will have to print more money to make up for the deficit, will have to monetize more, and that’ll cause a depreciation in the value of the dollar."

Dalio said the U.S. will turn to printing money to fund the deficit because demand for Treasuries won’t meet the nation’s borrowing needs and the government won’t risk choking off growth with higher interest rates. The currency may "easily" weaken by as much as 30 percent, creating a "dollar crisis," he said, though the economic contraction won’t be as sharp or severe as it was after the 2008 financial crisis.

Likening the current economic cycle to a baseball game, the money manager said the U.S. is probably in the seventh inning of a nine-inning game and so he’s "not particularly worried at the moment."

“Two years out is when I’m worried about,” said Dalio. “It’ll be more of a dollar crisis than a debt crisis, and I think it’ll be more of a political and social crisis.”

Two things in particular concern Dalio about the next downturn: Inequality in America will generate greater internal conflict than the 2008 collapse. Plus, policy makers have less room to respond, because interest rates are still historically low and because regulations have limited their authority.

In his new book, "A Template for Understanding Big Debt Crises," Dalio is trying to remind investors and policy makers that economic cycles are unavoidable. Eventually, debt builds up to unsustainable levels, defaults spike, the economy sputters and financial markets collapse. Attempts to prop up or stimulate demand late in the cycle, as the Trump administration did by cutting taxes, only potentially worsen the inevitable.

How a government responds to a debt crisis is more important than the nature of the crisis itself, Dalio writes.

“I think there should be an emergency economic powers act” allowing the President, the Fed chairman, the speaker of the House and the Senate majority leader “to do the things that are necessary,” if policy makers are constrained by legislation, he said in the interview.

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Economy
Interest payments on the federal debt could surpass the Defense Department budget in 2023.
interest, government, debt, military, ny times
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2018-06-26
Wednesday, 26 September 2018 11:06 AM
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