As President Joe Biden and his Republican opponent, former president Donald Trump, take the stage in Atlanta for their first campaign debate, America and the world will expect a lot of issues to be on the table. National security, immigration, and war and peace will of course be in the spotlight.
However, there is one issue that the two should debate more vigorously than anything else: the national debt.
Yes, it sounds too dry for anyone to tune into, but this is the one issue that transcends all the other. The national debt is a rapidly growing threat to the prosperity—the very livelihood—of America’s families and businesses. It is also a national security threat:
- When hostile nations team up with those that are skeptical of America and the sanctions-driven heavy hand of our foreign policy, and
- When those countries abandon the dollar for trade as well as for central bank reserves,
then the dollar rapidly loses value and—in an effect much like massive money printing—the economy suffers a major inflation wave. We should expect an inflation rate well above the 9% we saw recently, and we should expect this inflation episode to last for years. In the meantime, the U.S. economy suffers a significant economic downturn, a sharp rise in unemployment—and a drastic plummet in tax revenue.
Here is where the national-security connection becomes relevant. When tax revenue plummets and the dollar loses a lot of value, investors will flee the market for U.S. government debt. This will send interest rates rising, and sharply, in a desperate plea from the Treasury to investors to buy U.S. government debt.
Since investors will be going the other way, this process can become very unstable; even if the crisis does not explode as it has in countries like Argentina or Venezuela, it will be serious enough for Congress to reach the point where they simply have to do one of two things: actually and urgently cut spending, and actually and urgently raise taxes.
Most likely is a combination of the two, which we can refer to as fiscal austerity. It will cut across the board, and force Congress into reductions in everything from Social Security to national defense. The cuts will be large, painful, and rapidly implemented.
National defense will suffer critically in such rounds of spending cuts—which, again, is why the federal government’s $34.7 trillion debt is a national security issue, and should be debated as such by the two presidential candidates.
One reason why the debt is not being taken as seriously as it deserves is that its growth and current cost do not make regular, panic-inducing headlines. This is a crisis unfolding at glacial speed. But it is happening: the debt keeps growing, even when nobody is looking, and so is the debt cost, or the annual outlays for interest to the government’s creditors.
Over the past year, something has happened to the growth of the debt problem that we have not experienced before, especially not of this magnitude. Higher interest rates are conspiring with the endless growth in the debt itself, reinforcing the negative macroeconomic and fiscal impact of the debt.
As of June 26, 2024, the average annualized interest rate on the U.S. government’s debt ticked up another notch, from 3.21% to 3.22%. If the debt froze at its current size for a year, American taxpayers would have to pay $1,114 billion in interest on that debt.
One year ago, the average annualized rate on the U.S. debt was 2.6%. At that time, the debt totaled $32,195 billion; today, it is $34,749 billion. While the debt has grown by 8% in one year, the annualized interest cost has increased by 34%—more than four times faster than the debt.
Behold the combination of rising interest rates and rising debt:
- When a batch of debt expires, the U.S. Treasury sells new debt to pay the lender who bought the expiring batch, but
- Due to higher interest rates, the same amount of debt now costs the Treasury more money.
As a good example, on its June 26th auction, the Treasury sold $72.4 billion worth of 5-year Treasury notes. This batch replaced the one sold five years ago, which was only $43.3 billion. However, the expiring batch also cost a lot less: it came out of an auction back in 2018 with a median interest rate of 1.75%. The batch sold now pays 4.271% in median interest.
The old batch cost the Treasury $758 million per year in interest; the one just auctioned off is going to cost $3.1 billion per year. That is almost exactly a quadrupling of the interest cost.
A less dramatic but still protruding example is the June 25th auction of $71.4 billion worth of 2-year Treasury notes. Thanks to a batch-to-batch growth in the debt ($49.5 billion expired) and a rise in interest (from 3% to 4.66%), the interest cost on this little slice of the government’s debt went up by 124%.
There are plenty of these examples, all of which explain why the U.S. government debt is gradually eating all other spending programs out of the federal budget.
Since Congress is showing no interest in reining in spending, and Donald Trump—if he wins in November—will not be able to start working on legislation until late January next year, we have only one reason to believe in a moderation of the rising debt costs: that the Federal Reserve gets around to cutting its federal funds rate.
So far, we have no reasons to believe that they will, but other central banks are doing it. On June 19th, the National Bank of Hungary executed its sixth interest-rate cut this year. Lowering its policy-setting rate from 7.25% to 7%, the bank has almost cut its rate in half since October last year, when the rate stood at 13%.
Two days later, the Swiss National Bank lowered its governing interest rate from 1.5% to 1.25%. It was their second quarter-point cut this year.
In fairness, let us also remember that on June 20th, the Bank of England decided to keep their bank rate at the 5.25% level where it has been since August 3rd last year.
Will Biden and Trump debate the debt? For the sake of America’s future, let us hope they do.
