The United States is beginning to feel the repercussions of its substantial debt burden, which was accrued during a period of low interest rates. This debt is now being refinanced through new Treasury bonds, leading to a significant increase in interest payments, ultimately placing the financial burden on ordinary Americans.
According to the Committee for a Responsible Federal Budget (CRFB), the amount of money allocated for interest on the US national debt has nearly doubled from 2020 to 2023 and could potentially double again by 2032. This trend means that a growing share of American tax dollars will be channeled into servicing this debt. Most of the US government’s debt was issued when interest rates were considerably lower, and as interest rates rise, Americans are finding themselves responsible for a larger portion of the country’s expenditures.
Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, expressed concern about this situation, stating, “We are now on track to have paid more in net interest costs this year than on the entire military”. He likened this cycle to paying credit card fees on old debt, asserting that it drains money away from hardworking Americans, stifling the growth of new businesses and pushing families deeper into the burdens of inflation and taxes.
The Federal Reserve, in response to the 2008 recession, maintained a low federal funds target range to support economic recovery, keeping the effective rate below 0.25 percent until approximately 2016. This accommodative monetary policy facilitated the accumulation of debt during that period. However, the current upper limit on the federal funds rate is the highest since 2001, ranging between 5.25 percent and 5.50 percent, causing interest rates to rise accordingly.
The CRFB reports that nearly 60 percent of the current US debt originated when the average interest rate on ten-year Treasury notes was less than 3 percent. Furthermore, 75 percent of the debt held in three-month Treasuries was acquired at the same low rate. However, these debts are now being refinanced at significantly higher rates, with ten-year Treasuries at 4.61 percent and three-year Treasuries at 4.89 percent as of September 27.
Peter Earle, an economist for the American Institute for Economic Research, explained that rising interest rates lead to higher bond yields, impacting all bonds, including US Treasuries. As the Fed has raised the policy rate to combat inflation, the US Treasury has had to allocate more resources to service its outstanding debt, amounting to over US$800 billion per year, which constitutes 15 percent of total annual federal spending.
The US national debt surpassed US$33 trillion in September, representing an increase of approximately US$5 trillion since President Joe Biden’s inauguration. President Biden has advocated for significant spending programs, such as the American Rescue Plan, which introduced US$1.9 trillion in stimulus spending, as part of his economic agenda.
Richard Stern warned that as the debt grows and the feedback loop of interest payments intensifies, the US could experience higher inflation, rising interest rates, and slower economic growth. Additionally, there is a risk that federal debt and the US dollar may be perceived as increasingly risky investments, potentially leading to global de-dollarization, higher inflation rates, and a diminished role for the US in global commerce and investment.
At a recent BRICS summit, several countries expressed a desire to replace the US dollar as the global reserve currency, potentially leading to hyperinflation as dollars flow back into the US market, expanding the money supply.
The White House responded to concerns, with Michael Kikukawa, assistant press secretary, attributing much of the increase in debt over the past two decades to Republican tax cuts benefiting the wealthy and large corporations. President Biden’s approach aims to reverse this trend by asking the affluent and big corporations to pay their fair share, while also cutting subsidies to pharmaceutical and oil companies. The administration opposes using the debt created by previous tax policies as a pretext to reduce funding for Social Security, Medicare, and Medicaid.
In August, Fitch Ratings downgraded the US credit rating due to fiscal uncertainty and potential deterioration, making US Treasuries a riskier investment. This downgrade could lead to increased borrowing costs for the federal government as investors demand higher interest rates to compensate for increased risk.
Peter Earle emphasized the adverse consequences of mounting debt, including the crowding out of other government spending, erosion of confidence in the US dollar, reduced attractiveness for business, and diminished flexibility for emergency spending during crises. High levels of government debt are also viewed as a national security concern, with potential political instability and increased dependence on foreign debt holders, some of whom may not be US allies. The escalating national debt poses a significant threat to all Americans and future generations if it continues to grow unchecked.
For latest updates and news follow BLiTZ on Google News, Blitz Hindi, YouTube, Facebook, and also on Twitter.