Debt “Death Spiral” Approaching

Today our spirits wallow. And our brow is creased with worry…

For we are informed the United States is racing into a “death spiral” of debt.

That is, when every public dollar it borrows must service its debt… crowding out all other demands.

That debt presently exceeds $22 trillion.

It expands by day, by hour, by minute, by second.

But when does America finally go corkscrewing into the fatal abyss?

Eight years, 10 years — perhaps a dozen?

The all-important answer shortly.

But first a brief canvas of Wall Street… and the stock market.

The Trade War Strikes Again

The opening whistle blew this morning and the Dow Jones instantly sank triple digits.

Once again we must look to trade.

Chinese state media indicated early today that China is in no special hurry to resume peace talks.

This is because the United States once again crossed Chinese interests…

It has put Chinese telecommunications behemoth Huawei under the ban — the firm can no longer purchase components from American firms.

But stocks absorbed the initial blow… and gradually clawed their way back.

But not enough to break even. The Dow Jones ended the day 99 points lower.

The S&P lost 17 points; the Nasdaq 82.

And so the merry-go-round spins.

But when will the United States enter the “death spiral” of debt?

To begin we sit down with the facts…

Interest on the Debt: The Fastest-Growing Budget Item

Four items alone constitute 78% of the federal budget — Medicare, Medicaid, Social Security and interest on the national debt.

All other programs scratch along on the remaining 22%.

These include “defense,” education, scientific research, all bread, all circuses — all remaining programs.

But the fastest-expanding sinkhole in the budget… is interest on the national debt.

Interest on the debt is the great villain of our tale, the horseman of our apocalypse.

The United States government ladled out $221 billion in interest on the national debt through the first four months of fiscal year 2019.

That is nearly 10% greater than last year’s payments over the same space.

And this we have on official authority of the United States Department of Treasury:

Interest on United States public debt will stretch to some $591 billion this fiscal year — a record.

$2,000 out of Your Pocket

Could you put an extra $2,000 to good use this year?

Perhaps you could heave an extra $2,000 into savings, investment, leisure, charitable causes, etc.

But if you are the average American, the national debt denies you that option.

That is because over $2,000 of your tax bill is being siphoned to service this debt.

All of which transpires while the gross domestic product continues to expand.

In a growing economy, the old-time Keynesians preached a gospel of fiscal restraint.

It is the time to store in reserves, to save against the rainy day — the inevitable rainy day.

Come the recession, the government can then proceed against it with a brimming war chest.

“Countercyclical” policy, academic men style it.

But the old Keynesians currently preach before an empty church. The flock has gone winging off for the heretic faith of perpetual deficit.

And the United States is passing rapidly beyond all hope of heaven…

The Tragic Math

When unemployment last sunk to today’s 3.6% — in 1969 and 2000 — the United States government boasted surpluses.

In lean seasons these surpluses it could sacrifice upon the altar of “countercyclical” fiscal policy… and push back against recession.

But the Congressional Budget Office (CBO) projects this year’s deficit will verge upon $900 billion.

And CBO estimates GDP will limp along at an average 1.9% per annum the next decade.

But again, debt is piling on at 6% per year.

Trillion-dollar annual deficits are therefore in prospect for the next decade — at least.

Annual interest costs on the debt will scale $724 billion by 2025, estimates CBO.

And $928 billion by 2029… or nearly 25% of the entire budget.

When inevitable recession descends the war chest will not only be empty. It will have a gaping hole in its bottom.

But let us add another strand to the hangman’s noose…

CBO Numbers Don’t Account for Recession

CBO’s figures do not admit the possibility of recession for the following 10 years.

A handsome assumption, that is, given the present expansion will rank history’s longest come July.

How can it peg along another decade without recession?

Even the Federal Reserve is giving out visible and audible signals of the coming rough-house.

It is publicly airing mentions of negative interest rates, “standing repo facilities” (a variant of QE) — and more.

Would it ransack its toolkit for policy options if not expecting to use them?

Does a man ransack his closet for an umbrella… if not expecting rain?

$2–3 Trillion Annual Deficits

If the economy does sink into recession — depend on it — the government will plunge even deeper into debt to “stimulate” the economic machinery.

“We get a recession,” affirms analyst Sven Henrich, “and you are looking at $2–3 trillion [annual] deficits.”

Interest on the debt will swamp the budget — especially if interest rates rise.

CBO’s current 2029 forecast of $928 billion then appear quaint.

As stands, CBO estimates the average interest rate on the debt will rise from 2.3% last year… to 3.5% in 2029.

The Lord help us all if interest rates run much higher.

But when — again — will the United States go spinning into the death spiral of debt?

The “Primary Deficit”

The United States Treasury Department’s Office has issued its Fiscal Year 2019 Q1 Report.

In in, Treasury’s Office of Debt Management projects total U.S. government borrowing from the public.

Among the metrics it tracks is the “primary deficit.”

The primary deficit is:

The amount by which total spending exceeds total revenue — excluding interest payments on debt.

For the next number of years interest on the debt approximates other elements of the budget deficit.

But beginning in 2024, Treasury projects the primary deficit will fall to zero… and then turn negative.

Explains Zero Hedge:

While in 2019 and 2020 surging U.S. interest expense is roughly matched by the other deficit components in the U.S. budget, these gradually taper off by 2024… The real red flag is that starting in 2024, when the primary deficit drops to zero according to the latest projections, all U.S. debt issuance will be used to fund the U.S. net interest expense, which depending on the prevailing interest rate between now and then will be anywhere between $700 billion and $1.2 trillion or more.

And that is when the “death spiral” begins — 2024 — five years from today.

That is, when every new dollar Uncle Samuel borrows from the public goes to service interest on the debt.

The “Ponzi Finance” phase

Continues Zero Hedge:

In short… the U.S. will enter the penultimate Ponzi finance phase — the one in which all the new debt issuance is used to fund only interest on the debt — sometime around 2024.

Setting the business in concrete is Craig Eyermann, research fellow at the Independent Institute:

When the national debt reaches the point where all newly borrowed dollars must be used to pay this mandatory expenditure, the U.S. government will have passed the event horizon that marks the boundary of the national debt death spiral.

Of course, the United States may enter the fatal orbit later than 2024.

But also earlier.

Either case, it is dead on course…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning