As I’ve been saying all along…
“This is a dreadful fiscal show by any measure, or any country for that matter. The next time the U.S. Treasury lectures the Greeks or Italians about their fiscal woes, the southern Europeans should laugh out loud.”
That is commentary last week from the editorial board at The Wall Street Journal, my old employer. Now, I don’t typically agree with the WSJ editorial board, but in this case they’re squarely on the mark. That mark: Taking to task the Biden administration and his congressional comrades who have accumulated $1.62 trillion in deficit spending in just the first 10 months of the fiscal year.
Frankly, the editorial’s Biden-bashing element is myopic. America’s disastrous finances are a multi-presidential, multi-congressional, cross-aisle clown show that began in the Reagan years.
It all goes back to general political acceptance of the stupidest monetary theory imaginable: Deficits don’t matter.
Well, folks, 40 years later, turns out deficits do matter. They lead to mountainous and cancerous sums of accumulated debt. Which ultimately leads to rapidly growing debt-servicing costs that threaten to spiral out of control with rising interest rates.
Which is where the Journal‘s opinion piece really matters.
How Rising Interest Rates Impact Debt Repayment
I’ve been writing about this for some time—the idea that the Federal Reserve’s hyper-aggressive interest rate-hike regime was going to bite Uncle Sam in his ass. My thesis is as simple as it is painfully obvious: America has to service $32 trillion in debt, meaning every year the country has to roll over trillions of dollars of old debt and replace it with new debt.
That old debt was sold when interest rates were 3%, 2%, 1%… and even less.
The new debt is being sold today at more than 5.4% for three-month, six-month, and one-year Treasury bills, and between 4.25% and 4.9% for two- to 30-year Treasury notes and bonds.
Imagine if from one year to the next, the cost of servicing your mortgage debt rose from, say, 1% to more than 5%. What kind of impact would that have on your finances? On your ability to pay expenses that are productive to your lifestyle?
Well, it’s having the same impact on Uncle Debtster.
As the WSJ points out, through the first 10 months of fiscal 2023, the U.S. government has spent $572 billion on debt repayment. Think about that… More than half a trillion dollars with precisely zero productive use in the economy. That’s more than the country spends on Medicaid for 94 million Americans.
But here’s where you can see the real pain of the spiraling debt fiasco that I’ve been warning about, but which the Journal overlooked: In its fiscal 2023 budget, the Biden administration planned on $396 billion in interest repayment. Ten months into the year and we’re already 44% above projections.
That is entirely the result of the Fed driving interest rates higher at a drunkenly fast pace.
Remember: the 2023 budget was built more than a year ago (the federal fiscal year runs Oct. 1 to Sept. 30). That was a moment when Fed funds—the interest rate at which the Fed pushes and pulls—were below 1.7%.
Today, we’re above 5%.
So, even the White House budget mandarins were not expecting rising interest rates to hit so hard.
Issuing More Debt Just to Cover Interest Payments
And if you think about it for more than a second, you’ll realize this situation is only going to worsen as interest rate hikes continue.
Of America’s $32 trillion in debt, about 21.4% carries a fixed rate. And about 30% of that fixed-rate debt matures in 2023, while another 20% matures by the end of 2025.
That means older, low-rate debt is going to roll over at substantially higher rates over the next 29 months.
That’s hundreds of billions of dollars of increased debt-servicing costs America cannot afford but will be forced to pay. Where does that money come from?
It comes from issuing even more debt!
So, history’s most heavily indebted nation—a country that must rely on deficit spending to keep the lights on—has to sell even more debt just to afford the higher interest payments on existing debt.
You no doubt see the debt spiral we face.
Unless…
The Fed engineers a breakage somewhere in the economy that gives it cover to cut interest rates sharply.
Which is precisely the path I think we’re on.
The Fed has to save Uncle Sam from himself, and the only way to do that is to bring back super-low interest rates… and the only way to bring them back is to create a bespoke crisis fashioned explicitly for Uncle Sam’s benefit.
The upside: There will be an industry that wins.
Banking.
Sounds crazy to lots of people, and I get that. Several banks have failed so far this year because of Fed rate hikes, others are likely as the Fed keeps hiking.
However, well-run banks are going to survive this moment. But more on that—and the super-regional bank stock I’m buying personally—in follow-up dispatch.
The Wall Street Journal is right: This is a dreadful fiscal show.
But there will be winners. More to come…