Economy

Why Rising Interest on the National Debt Is So Problematic

US Debt

The US government is spending so much money these days that it’s becoming unfathomable even to grasp the amounts. Back in 2008, a one-time $700 billion bank bailout was considered a huge amount of money.

Yet today, the government regularly runs deficits over $1 trillion and reaching $2 trillion and no one bats an eye. Even worse, the interest payments on the overall national debt are approaching $1 trillion a year, which is a massively underrated threat to America’s fiscal sustainability.

In order to understand why the interest on the national debt being so high is problematic, it’s necessary to look at it from a couple of different perspectives to understand how it can damage the US economy.

How Bad Is Our National Debt Problem?

It may seem hard to believe, but there was once a time when there were fears in Washington that the national debt would disappear. Why fear, you may ask?

Well, that’s because the Federal Reserve uses the purchase and sale of US Treasury securities to conduct monetary policy. Without Treasury securities, conducting monetary policy would become much more difficult, if not impossible.

Back in the late 1990s and early 2000s, budget surpluses had some people in Washington thinking that eventually the national debt would be paid off. But thanks to the war in Iraq, the national debt shot up and never looked back.

Now we’re looking at a national debt approaching $35 trillion. Will that debt ever be paid off? What would it take to pay off that debt?

Well, the US government is expected to run a budget deficit of $1.9 trillion this year. And the interest alone on the national debt will reach almost $900 billion.

That means that in order to reduce the size of the national debt, the US government needs not just to balance the budget, but to run a massive budget surplus. If the government merely balances the budget, that would mean cutting $1.9 trillion in expenses in order to pay the $900 billion interest without running a deficit.

But guess what? That doesn’t decrease the national debt, and the next year the interest cost, assuming interest rates remain the same, is at least another $900 billion.

In order to bring that interest cost down, the total national debt has to be brought down to. So let’s look at the numbers.

Can the National Debt Ever Be Paid Off?

Right now the national debt is at $34.85 trillion, and the average interest rate on that debt is 3.27%.

Let’s say that the government cuts $1.9 trillion in spending in order to keep the budget balanced. But it still has to pay interest on the existing debt, so it would have to cut spending even further to get that interest cost to start falling.

If you look at the national debt like a 30-year mortgage, how much would the government have to cut each month in order to pay down the debt within 30 years? About $152 billion per month, or over $1.8 trillion per year.

That means that on top of cutting out the $1.9 trillion deficit, the government would also have to cut another $1.8 trillion in spending in order to pay off the national debt in 30 years.

If the government wanted to pay the debt off in 50 years, it would take $118 billion per month, or $1.4 trillion per year in extra cuts, in order to do that. And a 100-year payoff would require cuts of almost $99 billion per month, or nearly $1.2 trillion per year.

So no matter which way you slice it, the federal government would have to cut between $3.1 and $3.7 trillion of current spending in order to pay off the national debt within the next 30-100 years. Do you think that’s going to happen?

According to Congressional Budget Office (CBO) projections, total outlays for FY 2024 will total $6.8 trillion. Of that, $4.1 trillion is considered mandatory spending, $1.8 trillion is discretionary, and $900 billion is interest.

Where is $3.7 trillion of cuts going to come from? You would have to slash basically half of the entire federal budget, cutting basically the entirety of discretionary spending, plus half of mandatory spending.

What would senior citizens say if their Social Security and Medicare payments were cut in half? What would they say if on top of their welfare benefits being cut, the entire US military was just dissolved overnight?

That’s how bad the US government’s fiscal position is, that it would basically require shutting down the entire military and federal government apparatus plus cutting half of Social Security and Medicare in order to pay down the national debt.

Alternatively, you could just shut down Medicare and Social Security and keep the military and come up with a similar result, but that too has about as much a chance of happening as pigs flying. No matter where cuts come from, some faction with a lot of votes is going to object vociferously.

Because of that political inability to cut spending, you can conclude that the US government isn’t going to be able to pay off any of the national debt anytime soon. And if CBO’s projections are accurate, the US debt crisis will only continue to get worse, as deficits continue and the national debt continues to rise.

What that may lead to is a debt spiral in which an increasingly large amount of federal spending is required just to service the interest on the debt. And once the government starts having to issue more debt to service the interest on the old debt, it’s very likely only a matter of time before the debt problem spirals out of control.

Would that result in an outright repudiation of the national debt? Or would it result in higher inflation in order for the government to pay its debt with devalued dollars?

No matter which way the government tries to solve the problem, any solution that doesn’t address the problem of chronic overspending is likely to cause significant financial harm to the US economy.

So What Does That Mean For You?

As the US government continues to spend more money, it’s going to have to come up with some way to fund that spending. One way to do that is to issue more debt. But that has a limit.

At some point investors aren’t going to want to buy more debt, at least not if interest rates don’t increase. And with interest costs already high, that could lead to a further debt spiral.

Still, all that debt, which more often than not gets monetized, can lead to inflation. The more the government spends, the higher inflation could climb, and the more devalued your dollars become.

The other way the government can fund itself is through taxation, taking more of your hard-earned money. So if government spending continues to increase, don’t be surprised to see tax rates start to increase again as well.

Is There a Way to Protect Yourself?

Well, when the government wants something, it generally gets it in the end. But there are still ways to try to safeguard your savings and investments, to protect them against inflation, and to help minimize your tax burden.

Precious metals like gold and silver have been trusted as safe haven assets and inflation hedges for centuries. During the stagflation of the 1970s, both gold and silver saw annualized growth rates of over 30% per year over the course of the decade.

Many people hope that gold and silver will repeat that same kind of performance if inflation gets out of hand again this decade. And with recession potentially on the horizon, gold and silver remain popular safe haven assets today too.

Gold and silver can be held in tax-advantaged retirement accounts through a gold IRA or silver IRA. These can be funded with a tax-free rollover from a 401(k) into a gold IRA or silver IRA, allowing you to protect your existing retirement savings with physical gold and silver coins or bars while still benefiting from the tax advantages afforded by an IRA.

With government spending at risk of spiraling out of control, now is the time to start preparing for and protecting against the worst possible scenario. Gold and silver can play a role in helping you shore up your financial security to protect against what lies ahead.

With over $2.5 trillion in precious metals placements and over 6,000 5-star reviews from our satisfied customers, Goldco has helped thousands of Americans benefit from owning gold and silver. Call Goldco today to learn more about how gold and silver can help you safeguard your financial future.

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