Trillion Dollar Deficits As Far As The Eye Can See Will Teach A Hard Lesson: Deficits Matter

by Brian Maher of Daily Reckoning
We have spotted a raven of foreboding… a portent of evil to come…
Interest on the public debt struck $28.43 billion last month.
That is the highest figure for any February on record.
For the first five months of this fiscal year (Oct.–Feb.), interest on the public debt has risen 8% over the same period last year.
At $203.23 billion… that too is a record.

Justice requires us to remind that the United States Treasury often goes the month of February on a lean purse…
It is tax season… and tax returns deplete its coffers.
But this February emptied its change much more than the custom.
So the specter of trillion-dollar deficits once again appears…
“February Budget Deficit Surges as Interest on U.S. Debt Hits All Time High,” affirms Zero Hedge.
“U.S. February Budget Report Shows First Sign of Wider Deficits to Come,” warns MarketWatch.
Why the surging deficits — why now?
The answer arrives in two parts:
The Trump tax cuts… and higher government spending.
Zero Hedge:

According to the Congressional Budget Office, receipts declined by 9.4% from last year as tax refunds rose and the new withholding tables went into effect… Outlays meanwhile rose by 2% due to higher Social Security and [as] Medicare benefits rose and additional funds were released for disaster relief.

The pace should only quicken as the tax cuts take full effect and last month’s budget deal balloons spending over the next two years.
We’re heart and soul for tax cuts.
But not for higher deficits.
There is something within the liver and lights that demands a square accounting…
Spend more if you must, it whispers — but pay your way as you go.
Paying bills with borrowed money is the way of the scoundrel… the profligate… the bankrupt.
In 1970 — the year before Nixon cut the dollar’s final tether to gold — public debt totaled $275 billion.
Or in today’s dollars, $1.2 trillion.
And today?
U.S. public debt nears $21 trillion… and swells by the day.
Perhaps you wonder why.
“Some circumstantial evidence is very strong, as when you find a trout in the milk,” said Thoreau.
The trout turned up in the milk in 1971:

Now turn your attention to the parabolic rise in debt after the financial crisis of 2008.
Surely the interest on this debt has swamped the Treasury.
Ah, but with its massive bond purchases post-crisis, the Federal Reserve hammered interest rates to zero.
So interest payments on the debt have steadied since the financial crisis began — even though total debt now scrapes the sky.
In fact, interest payments on the debt were higher in the mid-1990s than last year.
But the days of wine and roses, of nearly cost-free borrowing… are over.
Marc Faber of the eternally sunny Gloom Boom & Doom Report:

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Years of near-zero interest rates… allowed governments and households to borrow money for almost nothing. But that’s changing… [and] this is where things get scary…

Since the Federal Reserve began raising interest rates in Q4 2015, interest payments on the United States national debt have soared 38%. Let that soak in… A 1.25% rise in short-term interest rates has corresponded with a 38% increase in the amount of interest paid for the United States national debt.

We let it soak in, Mr. Faber… and it seeped clear through to the marrows.
If a 1.25% rise in short-term rates translates to a 38% increase in interest on the national debt… what happens if rates truly “normalize”?
The Fed may raise rates four times this year alone.
Financial analyst Daniel R. Amerman:

Given its sheer size, if the interest rate on that debt were to rise by even 1%, the annual federal deficit rises by $200 billion. A 2% increase in interest rate levels would up the federal deficit by $400 billion, and if rates were 5% higher, the annual federal deficit rises by a full $1 trillion per year.

Current federal budgets are roughly $4 trillion, annual.
If interest rates rise to historic norms… could interest on the debt ultimately gobble 25% of the entire budget?
The mind staggers under the possibility.
But the math is the math.
Worry not, soothes the official voice.
Deficits don’t matter.
And for years they haven’t — or not much.
But the laws of economics will not be forever conned, the old-timers insist.
Actions demand reactions… scales must ultimately balance… and interest rates will one day normalize.
We suspect a great reckoning will prove once and for all that deficits do matter.
When that happens… is on the knees of the gods.
We do not pretend to know.
But we know what happens when a child plays with matches long enough…

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