Washington Yawns As Interest Payments Surpass Military Spending

Debt held by the public is projected to rise under current law to 125% by 2034. The nonpartisan Committee for a Responsible Federal Budget projects that it would rise to 133% of GDP by 2034 if Kamala Harris is elected and to 142% if Donald Trump wins.

Put aside the difference between the two; there's wiggle room in these estimates. The point is that both candidates are promising tax cuts and handouts that will propel the debt like rocket fuel.

Now it has been many years since the Debt Cassandras started predicting disaster and disaster has not come to pass. The debt-to-GDP ratio has soared past the red flags, yet investors keep buying the US Treasury's paper. Could the Cassandras be wrong? Could the real danger point be a much higher debt-to-GDP ratio than experts have imagined? Maybe there's nothing to worry about.

Earlier in the Greek legend, Cassandra had predicted Troy would be destroyed if the Trojans stole Helen, the most beautiful woman in the world, from her Greek husband Menelaus. No one took that prophecy seriously, either.

It didn't help that 10 years elapsed before it came true. As time passed and Troy continued to survive unscathed, the Trojans were lulled into complacency. Cassandra's such a pessimist! Why believe her?

The passage of time, combined with uncertainty about the debt's danger level, has likewise lulled Washington into complacency. Uncle Sam keeps borrowing and borrowing.

Sure enough, the government is still able to make its interest payments. Yet those payments are eating up a bigger and bigger chunk of the federal budget. Interest on the debt now exceeds spending on the military. Not too many years from now, interest payments will surpass Social Security as the single biggest line in the federal budget.

Beyond the snowballing effect of bigger interest payments on the federal budget, Debt Cassandras point to an even more serious problem. As the debt surges higher, investors in the government's bonds and notes will at some point seriously worry about getting their principal repaid.

When that happens, demand for the government's paper will plummet. To sell it, the government will have to offer much higher interest rates. Those higher rates will exacerbate the debt problem still further.

Those rates will also weigh heavily on the economy, and this time Congress won't be able to resuscitate it with tax cuts and deficit spending. Quite the opposite: The stratospheric interest rates on the government's own debt will force Congress to raise taxes and cut spending, further depressing the economy. In that nightmare scenario farm-program spending would likely not be spared.

Truth is, no one knows the debt-to-GDP ratio that would make creditors panic. Optimists point out that Japan's debt-to-GDP ratio is 250%. But that figure is deceptive, an analysis from the Federal Reserve Bank of St. Louis concludes. Taking into account things like intra-governmental transfers and reserve funds, the balance sheets of both countries' governments show the same net liability – 119% of GDP. (... )

Japan is also different because its national savings rate is high and relatively little of its debt is held by foreigners.

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The small minority of economists who subscribe to so-called modern monetary theory say governments such as the US that borrow in their own currency needn't worry about the debt; they can just print money to repay it. That's true, and the government probably would print money in a crisis. But the resulting inflation would be horrendous.

We don't know how long the debt can keep swelling before creditors panic and head for the exits. The more years that pass without it happening, the greater the temptation for optimists – including apparently most everyone in the nation's capital – to think it may never happen.

We have to hope the optimists are right; the nation is hitched to their wagon. But there's a terrible risk the Debt Cassandras could turn out as Cassandra of Troy did, their prophecies fulfilled but unheeded, to their compatriots' great misfortune.

Former longtime Wall Street Journal Asia correspondent and editor
Urban Lehner
is editor emeritus of DTN/The Progressive Farmer.

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originally published on
March 8
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