The Debt Spiral: A Math Problem Without a Solution

The recent surge in interest rates has brought the national debt crisis back into focus. With publicly held debt exceeding $31 trillion, accounting for over 100% of our GDP, it’s time to examine the math problem at its core.

Historically, America’s economy has grown faster than the interest rate on the national debt, allowing us to pay our bills without significant concern for fiscal implications. However, with current deficits and climbing interest rates, we’re entering a new era where borrowing becomes increasingly expensive by the day.

The issue is straightforward: when you borrow at a higher rate than your income grows, you’re digging yourself into a deeper financial hole. Consider an individual earning $100 per year with a debt of $100 and an 8% interest rate, but receiving a 4% raise. They can easily afford to pay off the $2 in interest from their increased income. But if they swap those rates around, every year will push them further into debt.

Recent events have exacerbated this math problem. Ongoing tensions with Iran have driven inflation higher, prompting lenders to demand higher interest rates to offset the erosion of future payments’ value. The influx of trillions of dollars in new debt has also led investors to insist on even higher returns to compensate for increased risk.

The ripple effects of rising interest rates aren’t limited to government debt alone. As banks use rates on government debt as a benchmark for their own lending, consumers and businesses will face higher borrowing costs across the board – from mortgages to car loans, and even home improvement financing.

Affordability is not solely a matter of price; research has shown that the cost of borrowing is indeed a cost-of-living variable. Creditors are already demanding higher “term premiums,” seeking more compensation in the form of higher interest rates when buying our debt. Higher rates mean higher debt service, which has become the fastest-growing part of our budget – a troubling feedback loop that’s hard to escape.

Fiscal irresponsibility has become a way for policymakers to deliver goods to their donors and constituents without facing real consequences. The fact that this behavior generates solid political benefits at no cost is a recipe for disaster.

U.S. economic policy offers some uncomfortable lessons here. Research shows that from the mid-1980s to the early 2000s, Congress reacted to higher forecasted deficits by working to reduce them with spending curbs and tax increases. However, by the time President George W. Bush pushed for big tax cuts in his first term, the political costs of fiscal irresponsibility had largely fallen away.

The profligacy that has defined U.S. economic policy for decades will ultimately produce devastating results – consequences we’ve already seen in other countries. The 2022 budget debacle in the United Kingdom is a stark reminder of what happens when international creditors lose faith in a nation’s ability to manage its debt. The dollar, as the globe’s main reserve currency, has managed to insulate us from this fate so far.

But let’s be clear: we can’t keep borrowing at these rates and expect to avoid the consequences forever. The math problem before us is not just about economics – it’s also a matter of politics and our collective willingness to face the music. Policymakers must finally take action, or they’ll continue to ignore the warning signs until it’s too late.

As we move forward, one thing is certain: the national debt crisis won’t be solved by simply rearranging deck chairs on the Titanic. We need a fundamental rethink of our economic policies and a willingness to make tough choices – not just for fiscal responsibility but also for the future of this country.