Mainstream media pundits and politicians generally act unconcerned about theย skyrocketing national debtย andย ever-growing budget deficits, but somebody has taken notice.
On Friday, Nov. 10, Moodyโs Investor Service lowered its outlook on U.S. government credit from โstableโ to โnegative.โ This could be a prelude to a downgrade in the countryโs AAA credit rating. The agency typically resolves an outlook by either revising it back to stable or executing an actual downgrade within 18 to 24 months.
Credit ratings represent an agencyโs assessment of the countryโs ability to make good on its debt obligations.
Moodyโs cited rising interest rates and the lack of political will to address the national debt as reasons for the outlook change.
In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moodyโs expects that the USโ fiscal deficits will remain very large, significantly weakening debt affordability.โ
Moodyโs also expressed concern about the โongoing political polarization within U.S. Congress,โ saying it will hinder the ability to โreach consensus on a fiscal plan to slow the decline in debt affordability.โ
Moodyโs is the last of the three major rating agencies to maintain a top AAA rating for the U.S. government debt.
This move by Moodyโs followsย a rating downgrade from AAA to AA+ by Fitchย in August.
โThe repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,โ Fitch said at the time, noting that the U.S. government doesnโt have any kind of โmedium-term fiscal framework,โ and operates under a โcomplex budgeting process. In other words, Congress sets the budget on a year-by-year basis.
These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade.โ
The Moodyโs outlook downgrade occurs as the U.S. government stands on the brink of another government shutdown. The current stopgap funding deal reached before the last deadline runs through Nov. 17.
Unsurprisingly, the Biden administration โdisagreesโ with the shift to a negative outlook. ย Deputy Treasury Secretary Wally Adeyemo claimed the U.S. economy โremains strongโ and touted the safety and liquidity of U.S. Treasuries.
White House press secretary Karine Jean-Pierre blamed Republicans, saying the outlook change was โyet another consequence of Congressional Republican extremism and dysfunction.โ
THE REAL PROBLEMย
Most people shrug off the debt, arguing that it hasn’t caused any significant issues yet, so there is no need to worry about it. However, manyย influential people in the founding generation warned about the dangers of debt.
James Madison called a large national debt a “national curse.”
“I go on the principle that a Public Debt is a Public curse and in a Rep. Govt. a greater than in any other.”
Thomas Jefferson said he consideredย โpublic debt as the greatest of the dangers to be feared.โ
In his Farewell Address, George Washington urged us to use debt sparingly โ and, get this, actually pay it off as quickly as possible!
“As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it.”
Antifederalist Brutus probably put it the most bluntly.
“I can scarcely contemplate a greater calamity that could befal this country, than to be loaded with a debt exceeding their ability ever to discharge. If this be a just remark, it is unwise and improvident to vest in the general government a power to borrow at discretion, without any limitation or restriction.”
The people failed to heed their warnings, and here we are.
Political posturing aside, the real problem is the U.S. government borrows and spends too much money, and the cost of borrowing is rising rapidly.
Deputy Treasury Secretary Adeyemo claimed that the Biden administration has demonstrated its โcommitment to fiscal sustainability,โ noting over $1 trillion in deficit reduction measures included in Juneโs debt ceiling deal. But this deficit reduction hasnโt shown up in reality. The administration consistently averaged half a trillion dollars in spending every single month of fiscal 2023.
As a result, the 2023 budget shortfall was bigger than any run during the Obama administration during the Great Recession, and yet this economy is supposedly strong. Typically, strong economies result in smaller deficits as tax revenue rises.
That was not the case in fiscal 2023. Federal Receipts fell by 9.3 percent to $4.44 trillion.
The federal governmentย enjoyed a revenue windfall in fiscal 2022. According to aย Tax Foundation analysis of Congressional Budget Office data, federal tax collections were up 21 percent. Tax collections also came in at a multi-decade high of 19.6 percent as a share of GDP. But CBO analysts warned it wonโt last. And government tax revenue will decline even faster as the economy spins intoย a recession.
Treasury Secretary Janet Yellen was quick to blame falling tax receipts for the big deficit and said it underscores โthe importance of President Bidenโs enacted and proposed policies to reform the tax system.โ
But the big problem is on the spending side of the ledger. Strong receipts in 2022 papered over the spending problem.
The U.S. government officially blew through $6.13 trillion in fiscal 2023. That was down slightly from last yearโs total expenditures, but the numbers were skewed by student loan forgiveness accounting. If you factor out a reversal of student loan forgiveness that was added to the spending column in 2022, the Biden administration spent $6.46 trillion in fiscal 2023, an 8.8 percent year-over-year increase in actual spending.
And the administration is already asking for more money to fund foreign aid for both Ukraine and Israel. In fact, no matter what you hear about spending cuts, the federal government is constantly finding new reasons to spend more money.
This underscores the fundamental issue. It isnโt that the U.S. government doesnโt have enough money. The fundamental problem was, and still is, that the U.S. government spendsย too much money. Despite the pretend spending cuts,ย the debt ceiling dealย didnโt address that problem. Even with the new plan in place,ย spending will go up. And itโs already historically high. That means big budget deficits will continue and the national debt will mount.
THE REAL PROBLEM PART II
This rapid increase in the national debt is happening during a period of sharply rising interest rates. This is a big problem for a government primarily relying on borrowing to pay its bills.
Interest expense rose by 23 percent to $879 billion in fiscal 2023. Net interest, excluding intragovernmental transfers to trust funds, rose by 39 percent to $659 billion. Both of those numbers broke records.
Gross interest payments amounted to 3.28 percent as a share of gross domestic product, according to a Treasury Department official quoted by Reuters. That was the highest since 2001. The net share of interest expense came in at 2.45 percent, the highest since 1998.
The average interest rate on the debt now stands at the highest level since 2011, coming in at 2.92 percent as of the end of August. But thatโs still relatively low, and the debt is more than double what it was back in the good olโ days of 2011.
Meanwhile, the average interest rate is poised to climb rapidly. A lot of the debt currently on the books was financed at very low rates before the Federal Reserve started its hiking cycle. Every month, some of that super-low-yielding paper matures and has to be replaced by bonds yielding much higher rates. That means interest payments will quickly climb much higher unless rates fall.
To give you an idea of where weโre heading, T-bills currently yield about 5.5 percent, the two-year yield is over 5 percent and the 10-year currently yields close to 5 percent.
Rising interest rates drove interest payments to over 35 percent of total tax receipts. In other words, the government is already paying more than a third of the taxes it collects on interest expense.
If interest rates remain elevated, or continue rising, interest expenses could climb rapidly into the top three federal expenses. (You can read a more in-depth analysis of the national debtย HERE.)
You donโt need a Ph.D. in math or economics to recognize that the downward credit outlook revision By Moodyโs was warranted. In fact, it seems almost absurd that the agency still maintains a AAA rating on U.S. debt.
The U.S. fiscal situation is a complete mess and nobody in Washington D.C. has the political will to do what it takes to address the issue. Any budget plan Congress agrees to will amount to nothing more than another kick of the can down the road. The question is: how much road is left?
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