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A blog by Leon Oudejans

Higher interest rates mean greater danger for U.S. debt (WaPo)

Washington Post title: Higher interest rates mean greater danger for U.S. debt
By: the Editorial Board
Date: 7 October 2023

Introduction LO:

From a pure political perspective, Democrat Joe Biden is forcing his opposing Republicans to make future budget cuts. The Democrat voter base will (probably) suffer from that future austerity. However, those Republican budget cuts will – most likely – also cause a return of Democrats in office.

In the past, this (successful) approach was used by Republicans against Democrats. Joe Biden is now using that Republican playbook against them. Similarly, the near government shutdown of 30 September 2023 was first initiated and then stopped by Republicans. Republicans know they would be blamed.

The above is about Power and who has it and who wants it. Logic and ratio hardly apply. The only thing that Power cares about is Power (eg, my recent blog and Lord Acton quote).

In just 45 days, there will be another showdown – and possible government shutdown – on November 17 (eg, Axios). A 2022 Liz Truss-style government crisis becomes increasingly likely in USA.



Higher interest rates mean greater danger for U.S. debt (WaPo)


“Borrowing is expensive again, as anyone who has tried to buy a car or home lately can tell you. The interest rate on 10-year Treasury bonds, the benchmark for home loans, is hovering around 4.75 percent, a nearly two-decade high. This will significantly add to the federal government’s expenses and raises the urgency to lower the deficit.Interest costs are already the fastest-growing part of the budget. Net interest costs — a nonnegotiable expense — nearly doubled as a share of federal outlays between 2020 and 2023, going from $345 billion, or 5 percent, to $660 billion, or 10 percent. (Defense, by comparison, cost $815 billion, or 13 percent of spending in 2023.)

The higher rates partly reflect the Federal Reserve’s necessary campaign against inflation, but they also mean that the miracle of compounding is now working against the country’s fiscal stability. Barring policy changes, recent interest rate increases could add $3 trillion over the next decade to interest costs, according to Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget.

In addition to financial danger, there’s irony here: While millions of Americans bought or refinanced homes at mortgage rates below 4 percent in recent years and locked those cheap rates for 30 years, the U.S. government failed to do so. Top Democratic economists such as Janet L. Yellen and Lawrence H. Summers urged a government borrowing spree during a period of seemingly permanent low interest rates before 2020. They argued it was wise to borrow long-term and invest in productivity-enhancing infrastructure and education, as well as the green transition. The government did indeed borrow massively in 2020, but largely to keep businesses and consumers solvent during the pandemic. The Biden administration and Congress have subsequently made investments but were unable to lock in low rates for decades. The average maturity in the federal debt portfolio is about six years, meaning a huge chunk of government debt must soon be refinanced at high rates. Consider the three-month Treasury bill. The yield on that was almost zero in 2021. Now, it’s more than 5 percent.

There was already a critical need for Congress and President Biden to start addressing the long-term fiscal situation through some combination of higher taxes, moderate expense cuts, and adjustments to Social Security and Medicare. We laid out a plan earlier this year to stabilize the debt. The sobering new interest-rate reality makes it even more pressing. Indeed, the infamous crowding-out effect from large federal debts might start making a comeback. Instead of providing capital to invest in private business, directly or through the stock market, people with extra cash are likely to choose to earn high rates on less risky government debt. This could hurt U.S. growth. One sign that investor caution, and not just Fed policy, is at work: Interest rates on government debt have continued to rise well after the Fed’s last hike, which occurred in July.

With the House of Representatives in chaos, perhaps the best hope is for a bipartisan group of senators to launch a debt commission to generate a plan. It might not get taken seriously for a while with the 2024 election looming. But if interest costs remain high, so will the risks of inaction.”


Sources:
Washington Post, 7 October 2023: Higher interest rates mean greater danger for U.S. debt
and
Axios Macro, 16 October 2023: The U.S. government’s interest bill is skyrocketing

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