Is the U.S. Caught in a Debt Death Spiral?

It’s a sign of how much trouble we’re in when a federal budget deficit of a half trillion dollars seems like fiscal restraint.

This is progress, given that annual budget deficits ran above $1 trillion a year throughout President Barack Obama’s first term, hitting a high of $1.4 trillion. And it could have been worse. Recall Obama’s unwillingness to deal with Republican-backed spending reductions amid the 2011 fight over automatic spending cuts, known as the sequestration.

But a half trillion dollars is still a mountain of money. It helps to give the number some context.

To reach a half trillion dollars, you must spend $8 per second beginning with the year 0 and continue spending through today. If you had a stack of $1 bills adding up to $500 billion and put them one on top of another, the stack would be 34,000 miles high.

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Keep that in mind and consider a few projections from the Congressional Budget Office’s long-term budget outlook, which was released recently. Keep in mind, too, that the CBO, although allegedly nonpartisan, is a government entity and tends to make overly optimistic projections.

  • The federal debt, which now exceeds $17.6 trillion, will increase by $40 trillion over the next two decades. That’s an average of $2 trillion per year. And this projection is based on Congress taking action to rein in spending.
  • Under an “alternative baseline” included in the report, the federal debt will increase by $10 trillion over the next decade, then by an additional $100 trillion over the two decades that follow.
  • This bleaker projection is based on Congress continuing its current policies. Writing in The Wall Street Journal, U.S. Sen. Rob Portman (R-Ohio) noted that the projection assumes there will be no recessions, wars, terrorist attacks or natural catastrophes further burdening the federal budget – and that interest costs on the national debt will remain at near-historic lows.

Keep in mind that 77 million baby boomers have begun retiring, which will place additional strain on Social Security, Medicare, and other government services. The price of implementing Obamacare is another burden.

As the CBO puts it, “the pressures of an aging population, rising health care costs, and an expansion of federal subsidies for health insurance would cause mandatory spending to rise as a percentage of GDP.”

As the chart above demonstrates, even if federal spending is kept in check, relatively speaking, federal debt held by the public will escalate at a frightening rate. You may or may not be worried about the level of debt 25 years from now, but do you want to leave your children with a debt load of $100 trillion?

How can debt increase so rapidly, even if spending remains relatively steady?

With baby boomers retiring and Obamacare being implemented, it’s no surprise that health-care costs will rise significantly, along with the cost of Social Security. The third major increase will be in the cost of servicing the debt.

This year, according to the U.S. Treasury, debt service will cost $354,863,251,628.78. That nearly $355 billion is the cost of excessive spending. There is no return on that investment. It can’t be used to help the poor, rebuild our roads and bridges, or protect the country.

Note in our second chart that the cost of “net interest” will more than double over the next 25 years. As grim as it may seem, that projection may be far too rosy. One reason for the increase is that the amount of debt we’re servicing continues to increase.

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As The Washington Times reported, “Raising the 40-year average federal debt-service cost of 2.2 percent by the same factor as the federal debt’s hike would boost federal debt-service costs to a whopping 4.2 percent of GDP — 2.6 percent higher than it was last year.”

Even more significant, the interest rates we pay on our debt are bound to increase.

“Combining these two adjustments — raising federal debt-interest costs to their 40-year average and then adjusting it for the federal debt’s increase — would add 2.6 percentage points of GDP to last fiscal year’s deficit, raising it to an extremely high 6.7 percent of GDP,” according to The Washington Times.

Convert 4.2 percent of GDP into fiscal 2013 dollars and you have $694 billion, which would make servicing the debt second in cost only to Social Security, which costs $803 billion, and larger than Medicare, which costs $495 billion.

Convert it to 6.7 percent of GDP and servicing the debt costs $1.107 trillion.

What if the cost of servicing the debt increases beyond the 40-year average? As U.S. debt increases, the U.S. could be considered a less reliable borrower and the U.S. credit rating could drop, which would result in lenders charging a higher rate for the money the U.S. borrows.

As the CBO notes, “At some point, investors would begin to doubt the government’s willingness or ability to pay its debt obligations, which would require the government to pay much higher interest costs to borrow money.”

The higher the cost of servicing the debt rises, the less money consumers have available to spend and businesses have available to expand. Economic growth then stagnates, which makes it even more difficult to pay for servicing the debt. And that leads to even greater economic stagnation.

“With deficits as big as the ones that CBO projects,” the CBO report says, “federal debt would be growing faster than GDP, a path that would ultimately be unsustainable.”

So why are our political leaders doing so little about the federal debt – except to make it bigger?

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Written by Brenda P. Wenning, president of Wenning Investments LLC in Newton, Mass. 

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