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In fiscal year 2020, at the height of covid stimulus mania, Congress managed to spend nearly twice what the federal government raised in taxes.
Yet in 2021, with Treasury debt piled sky high and spilling over $30 trillion, Congress was able to service this gargantuan obligation with interest payments of less than $400 billion. The total interest expense of $392 billion for the year represented only about 6 percent of the roughly $6.8 trillion in federal outlays.
How is this possible? In short: very low interest rates. In fact, the average weighted rate across all outstanding Treasury debt in 2021 was well below 2 percent. As the chart below shows, even dramatically rising federal debt in recent years did not much hike Congress’s debt service burden.
This is an exceedingly happy arrangement for Congress. Debt is always more popular than taxes for the same reason starting a diet tomorrow is more popular than starting today. Austerity does not sell when it comes to retail politics; spending trillions today while merely adding to what seems like a nebulous, faraway debt definitely does. And American lawmakers are uniquely fortunate in this regard. As French finance minister Valéry Giscard d’Estaing infamously announced in the 1960s, the Bretton Woods monetary system created “America’s exorbitant privilege.” He understood how the US dollar’s status as the world’s reserve currency would allow America to effectively export inflation to its hapless trading partners while maintaining cheap imports at home. But he may not have fully grasped the political privilege which would accrue to Congress.
Is this privilege sustainable? That may well be the most important political question of the twenty-first century. As Nick Giambruno explains, our forty-year experiment in relentlessly lower interest rates may soon end regardless of what the Fed does. Markets and geopolitics are powerful forces. Inflation, huge projected deficits, economic sanctions on Russia, oil disruptions, and a diminished appetite around the world for propping up Uncle Sam forever all exert upward pressure on Treasury rates. The Fed proved it can and will serve as market maker and backstop for US Treasurys, with its sordid QE (quantitative easing) bond purchases after the Great Recession and its deranged response to covid. But it cannot force investors, even crony institutional investors, to buy American bond debt at rates well below inflation forever. This is not hypothetical; Giambruno notes how certain Treasury yields quietly rose five time just since the absolute lows of 2020.
If Treasury rates continue to rise, and rise precipitously, the effects on congressional budgeting will be immediate and severe. Even if we laughably assume total federal debt remains static at around $23.8 trillion (the publicly held portion of the $30 trillion), interest rates of merely 2 or 3 percent will cause interest expense to rise considerably. Average weighted rates of only 5 percent would cost taxpayers more than $1 trillion every year. Historically, average rates of 7 percent swell that number to more than $1.5 trillion. Rates of 10 percent—hardly unthinkable, given the Paul Volcker era of the late seventies and early eighties—would cause debt service to explode to over $2.3 trillion.
Coffee the Christian way: Promised Grounds
Again, even 5 percent average rates would cause debt service to become the single biggest annual expenditure for Congress—ahead of Social Security ($1.2 trillion), Medicare ($826 billion), and the Department of Defense ($704 billion). The starting point for budget makers every year would be an interest expense totaling nearly half of realistic tax revenue. And keep in mind that these figures are for the existing federal debt, exclusive of the vast future deficits that are almost dead certain to happen. Seniors like entitlements, and the percentage of Americans over sixty-five is set to double by 2050. Republicans and Democrats like war, busy as they are installing more US troops in Poland and envisioning new aircraft carriers to patrol the Mediterranean (yes) and the South China Sea. What happens when the interest-bearing debt is $40 or $50 or $60 trillion?
At some point, given the sheer and utter profligacy of Congress, will the world demand junk bond rates to loan America another dime? Everyone knows the US will never pay its debts except nominally through inflation; everyone knows off–balance sheet entitlement promises cannot be kept in any meaningful way. Spendthrifts get cut off eventually, even those with powerful militaries and hegemonic currencies. This may not happen soon, if for no other reason than that the rest of the world holds trillions of US dollars too. But if American exceptionalism goes the way of the British Empire, this will be the reason why.
During the incontinent George W. Bush administration, Dick Cheney infamously chided Treasury secretary Paul O’Neill with the assertion “Reagan proved deficits don’t matter.” We see the same deluded thinking today among proponents of modern monetary theory, the idea that sovereign governments can command resources at will. This mentality pervades Congress, which in turn is rewarded by voters who want wars and welfare today without thought to future generations. They choose to believe the Cheneys and the MMTers, who tell them deficits and debt are essentially costless.
But debt and deficits do matter. We are about to find out how much they matter. The good news, and it is very good news, is that Americans soon may enjoy the benefits of compounding interest on savings (our grandparents can explain this to us). Civilization begins and ends with capital accumulation, the very thing politics and central banks attack with impunity. It is beyond time to reward savers and punish Congress.
About the Author
Jeff Deist is president of the Mises Institute. He previously worked as chief of staff to Congressman Ron Paul, and as an attorney for private equity clients. Contact: email; Twitter.
Image by fedrik via Flickr, CC BY 2.0. Article cross-posted from Mises.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
