OPINION:
Try to visualize a trillion dollars.
Comparisons for a trillion of anything are difficult. Using time as a familiar frame of reference, a million seconds will elapse in about 12 days. A trillion seconds stretches beyond 30,000 years. When you see reports on $35 trillion in federal debt, you may finally appreciate we are courting disaster.
Every 100 days, the federal government transfers $1 trillion from tax receipts to cover interest payments (not principal) on earlier borrowing. We also borrow more money to pay the interest on past debt. To quote the late economist Herb Stein, “If something cannot go on forever, it will stop.” And it will.
Of course, we can always print more money. That strategy has been tried before. In Argentina in the early 1990s, inflation was running as high as 20,000%. New bill denominations were regularly being printed, resulting in “old” paper money being devalued by losing several zeros overnight.
In late 2020, Zimbabwe saw inflation running over 550%. That government was printing huge bill denominations to retain consumer buying power. Before the economy collapsed, a Zimbabwean $100 trillion bill was worth 40 cents in U.S. currency. These are extreme examples, to be sure, but provide a reminder that there is no free lunch.
Leaving debt and annual deficits unaddressed, interest payments on the debt could eventually equal all the tax receipts collected by the IRS. Interest payments of $2.4 billion a day are on autopilot and will soon be the fastest-growing part of the federal budget.
Credit rating agencies have previously either downgraded the credit quality of the U.S. Treasury or issued warnings about potential future downgrades. With lower ratings, bond purchasers demand higher interest to execute a loan to the Treasury. And as interest rates rise on government debt, so does it increase for more typical borrowers.
Consider a mortgage: If you’re buying a $500,000 house with a 20% down payment ($100,000) and a loan term of 30 years, a 3% interest rate — the pre-pandemic norm — would amount to a monthly payment of just over $2,000. Apply a 7% interest rate — today’s norm — and the monthly payment jumps to more than $3,000. In other words, if you could afford a $500,000 house with a 3% interest rate, the equivalent monthly payment now could get you only a $350,000 house.
Over time, the federal government will have no choice but to raise taxes — and not just on millionaires and billionaires. The IRS reports that the top 5% of earners pay 65% of all income taxes. There is not enough income left to tax among those people without having a depressing effect on economic activity, including job creation. The one tactic left is a value-added tax that is used in 170 countries to capture revenue. A typical tax on sales is around 20%. Add that to the cost of a car, a small appliance, or a tube of toothpaste, and you will begin to see why the federal debt matters.
Of course, the federal government could find the will to cut spending drastically or, at a minimum, freeze entitlement programs at current spending for several years. According to Harvard University economist Karen Dynan, to reduce annual deficits to the point where public debt levels off, Congress would need to enact spending cuts of roughly $800 billion annually. In an era of divided government, that concept is a bridge too far.
At this rate, a U.S. default is more likely than ever. JPMorgan Chase CEO Jamie Dimon claims we’re going 60 mph toward a cliff with millions in jobs, savings and entitlements at risk.
We need members of Congress to hold hands and jump off that cliff with parachutes to ensure a safe landing. If not, we may be jumping off in free fall.
• Rick Berman is president of RBB Strategies.
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