You Can't Spend Your Way Out of This

This past Tuesday, the Congressional Budget Office (CBO) released a report that says that the budget deficit will grow through 2023 and it states that it will eventually require the government to raise taxes, reduce benefits and services, or undertake some sort of combination of the two. Here is the kicker, these steps will be needed just to cover the interest payments.

You know that point when you have a mortgage or student loans, you've been making your payments, painful as they may be from month to month, then look at your end of the year statement and realize the principal isn't going down. That all the money you've put into these payments are just for the interest. The country is starting to get that way.

The CBO projects that interest rates on the Ten-Year Treasury Note will rise from 2.1 percent currently, to 5.2 percent in 2017. A mix of every bond ratings declining and the fed continuing to eat most of the free market action on bonds has helped keep this rate artificially low for some time, but the CBO is projecting that these rates will not stand over the next 5 years. Since the government usually pays no more then the interest in it's debt anyway, and is still borrowing at ridiculous levels, our payments to service the debt, a topic getting not nearly enough explanation during the fiscal cliff crisis, will go up... by a lot.

In December, the Treasury Department reported that total interest bearing debt owed by the government carried an interest rate of 2.5 percent. FY2012’s interest payments on our debt was in the neighborhood of $360 billion. If interest rates overall reflect the CBO’s forecast for the benchmark, these interest payments alone will clear the $1 Trillion mark by 2017. At which point we will be spending more on debt then on education, or welfare, or even national defense. It would also equal about the amount of money we have to borrow now to just make it though a fiscal year.

What an odd coincidence that Obama will be out of office at the end of 2016. But, like a first divorcee of a gold digger, we get stuck paying off the bill for this multi-year shopping spree. Leaving us with the choice of paying our obligations to our debt, or spending money on frivolous things like Social Security or Medicare. 

Couple this very predictable crisis with the possibility of dipping into another recession if the can-kicked sequester on defense spending proceeds and the economy doesn't see a turn around in the next, oh, lets say, three to five hours. Another recession and more spending could also push us into more bond rating trouble, which could push the 5.2 percent guesstimation of the CBO even higher, causing even higher payments, well, you can see how this can go from horrible to downright cataclysmic if everything doesn't go according to plan.

Or, the more likely route, the fed will continue to buy up bonds with this magical invisible stockpile of money they have. Shoring up Social Security and Medicare as they start to pay out more then they take in in the trillions. All the while this is used as an excuse to raise tax rates and come up with new things to pay tax on, (Internet Tax?) while never addressing the real problem, that this government (note that I'm not singling out the president) has a significant spending problem.