In a startling revelation that emerged from the latest monthly US Budget Deficit report, interest payments on the US Federal debt are on track to hit a whopping $1 trillion, raising serious concerns about the nation's fiscal sustainability.
A substantial surge in government outlays, coupled with declining tax revenues, resulted in the fiscal deficit for June nearly tripling year-over-year to $228 billion, significantly overshooting the consensus estimate of $175 billion.
As government expenditures ascended to $646 billion in June, marking a 15% increase and an uptick of almost $100 billion from the previous year, tax receipts simultaneously plummeted 9.2% from $461 billion to $418 billion.
This precipitous decline in tax receipts is the largest observed since June 2020, during the depths of the Covid lockdown-induced recession.
The dramatic widening of the budget deficit has been spurred on by rapidly rising interest rates, as the Federal Reserve attempts to rectify the monumental policy failure of 2020 and 2021. During this period, the Fed kept interest rates at near-zero levels, while simultaneously injecting trillions into various asset bubbles.
Consequently, the fiscal deficit for the first nine months of the current fiscal year is already the third highest on record, trailing only the crisis years of 2020 and 2021. With a fiscal deficit of $1.393 trillion for 2022 to date, this represents a 170% increase compared to the same period last year.
Deep within the Treasury Monthly Statement, on page 9 of Table 3, a genuinely shocking figure is laid bare: in the current fiscal year's first nine months, the US has already accumulated an unprecedented $652 billion in gross debt interest. This figure surpasses the comparable period's interest expense payment from a year ago by over 25%, amounting to $521 billion.
This burgeoning interest expense is driven by soaring interest rates as the Fed, in a state of panic, scrambles to counterbalance the over-extended period of zero interest rates and consequent asset bubbles. Even if the Fed were to reduce interest rates, the delay in rolling over maturing debt would ensure that actual interest payments continue to climb for the foreseeable future.
Notably, the weighted average interest on the total outstanding debt at the end of June was only 2.76%, a level not seen since January 2012, as per Treasury data.
Given the Fed's indication of maintaining "higher for longer" rates, the blended rate on the debt could breach the 4% mark within a year. This scenario would result in interest payments on total US debt of $32.3 trillion reaching $1.3 trillion within 12 months, potentially outstripping social security to become the single largest US government expenditure.
Despite the rising alarm, Treasury Secretary Janet Yellen has attempted to assuage concerns by pointing out the historically low ratio of interest payments to GDP, after adjustment for inflation. However, such arguments gloss over the looming reality that GDP is likely to plunge following the next recession, while the US debt will never decrease in absolute or relative terms.
With the endgame in sight, the mounting federal debt interest payments represent an impending crisis for the US economy. As the threshold of $1 trillion in interest payments draws near, it is crucial that these figures become a significant point of discussion in the forthcoming presidential elections, stimulating an urgent debate on fiscal responsibility and sustainable economic management.
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What could be the potential economic consequences if the interest payments on US Federal debt surpass the $1 trillion mark and become the single largest government expenditure?