Tag Archives: finance

Default Looms.

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            Government deficits are covered by borrowing.  The government issues I.O.U.s in the form of Treasury bonds and other paper.  The borrowing gets added to the existing government debt.  The interest paid on that debt then becomes a current government expenditure.  It’s the same as paying for the Department of Defense or Social Security or air-traffic control. For may decades, the “Big Three” of US government outlays has been Social Security, Medicare and Medicaid, and Defense.  (Together they accounted for about two-thirds of all federal spending.) 

            Then came Covid and shut-downs that threatened the economy.  Government, under both the Trump and Biden administrations, stepped up to the plate (or trough, if you’re a Paleo-Finance person).  Vast sums were paid out to “stimulate” the economy.  The total national debt now stands at more than $36 trillion. 

Inflation followed during the Biden administration.  Administration spokespeople down-played the price rises as long as they could.  Eventually, an election loomed.  The enraging effect on consumers and borrowers became too great to ignore.  The Federal Reserve Bank raised interest rates to choke off the inflation before it became really serious. 

            One effect (but not the only one) came in the borrowing costs paid by the government to entice lenders.  In 2024, interest payments by the federal government reached $881 billion.  Interest on the debt rudely shouldered its way past Defense as the third largest government expenditure.[1]  “But Wait!  There’s More!”  President Trump’s “Bigly Beautiful [Budget] Bill” has been projected to add $3 trillion to the debt by 2035.  Then the effect of tariffs on the economy is uncertain.  Economists expect the levies on imports to push up prices and slow the economy.  That would generate less revenue, perhaps less than the income from the tariffs. 

            Panicky warnings appeared in the media.  At some point, there could be a flight from US Treasuries by investors (including foreign governments that hold dollars) who doubt the value of promises to pay at least the interest.  The Federal Reserve Bank would have to raise interest rates much higher to rent the money to cover the interest on the debt or to finance current deficits.  Furthermore, government borrowing could crowd-out private sector borrowers who want the money to invest in productive activities.  That would drag on the economy, to put it mildly. 

            Is there a way out of this dilemma?  Yes.  It will require acting on both sides of the problem.  On the one hand, it means tax increases.  On the other hand, it means spending cuts. 

            Tax who and by how much?  The net worth (assets, not income) of the five richest Americans comes to about $1 trillion.[2]  The net worth of the next ten comes to about $1.1 trillion.  But income is what the government mostly taxes.  That’s much less than net worth. 

            Cut what and by how much?  To go where the money is, it means cutting Social Security, Medicare and Medicaid, Defense, and Interest on the debt. 

            Both taxation and spending cuts will have to reach pretty far down into the ranks of the American middle class.  It will be hard to find politicians to vote for that.  The alternative is for ordinary American to suddenly abandon their “put it on the credit card” approach to citizenship.  Won’t happen.  Default looms.  After that, the International Monetary Fund will impose reforms. 

[1] “National debt: Why Congress no longer cares,” The Week, 6 June 2025, p. 17. 

[2] List of wealthiest Americans by net worth – Wikipedia 

Not the Country We Once Were 2.

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            Why are bond-holders retreating from U.S. Treasury bonds now?  The huge deficits and growing national debt have been around for a while.  The willingness and ability of the United States government to pay the interest on the debt is no different now than it was a year ago or—in all likelihood—a year from now.  How is the sell-off to be explained? 

            Peter Goodman of the New York Times,[1] has raked up a variety of explanations.  They require some interrogation.[2]  Goodman doesn’t necessarily connect the explanations, but they can be read to point in one direction. 

“An erosion of faith in the governance of the world’s largest economy appears at least in part responsible for the sharp sell-off in the bond market in recent days.”  President Trump’s tariffs, he reports, have “shaken faith in that basic proposition [that the US will properly manage the global environment and maintain its creditworthiness], challenging the previously unimpeachable solidity of U.S. government debt.”  Goodman quotes Professor Mark Blyth of Brown University for support.  “The whole world has decided that the U.S. government has no idea what it is doing.”  He adds that “[o]ne reason [for the bond sell-off] appears to be an effective downgrading of the American place in global finance, from a safe haven to a source of volatility and danger.”  Purportedly, the tariff war with China, in particular, creates the danger of a global recession and undermines the role of the U.S. as the manager of the world’s “peace and prosperity.” 

I can believe the first half of this, but the second half is less credible.  Nothing fiscal is threatening the creditworthiness of the United States right now.  Why do tariffs disturb the bond market?  Similarly, bonds are commonly regarded as a hedge against stock fluctuations and in recession.  So, fear of a recession is making people sell bonds, rather than buy them? 

Goodman mentions other possible factors:

“Hedge funds and other financial players have sold holdings as they exit a complex trade that seeks to profit from the gap between existing prices and bets on their future value.”  This sounds very much like “financial players” are dumping bonds now to force the government to raise the yield on bonds.[3]  Today’s sellers will then buy back the bonds at a higher rate tomorrow.  Similarly, “[s]ome fear that China’s central bank [which holds $761 billion] in U.S. Treasury debt, could be selling as a form of retaliation for American tariffs.” 

What are the effects of investors selling bonds now?  In early April 2025, “the yield on the closely watched 10-year Treasury bond soared to 4.5 percent from below 4 percent—the most pronounced spike in nearly a quarter century.”  Raising interest rates to attract borrowers “tends to push up interest rates throughout the economy, increasing payments for mortgages, car loans and credit card balances.”  This will hurt ordinary Americans.  They will howl. 

            Are Wall Street and China pressuring President Trump to lay off his incoherent tariff policy?  If so, is that who we want to surrender to?  It won’t be the last time. 

[1] Peter Goodman, “Trump Tariffs Shake Faith In the Safety of U.S. Bonds,” NYT, 14 April 2015.

[2] Pin on The Far Side 

[3] “Speculators have been unloading bonds in response to losses from plunging stock markets, seeking to amass cash to stave off insolvency.”  Does this mean that other “financial players” are in danger of getting gored as collateral damage? 

Not the Country We Once Were 1.

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For quite some time now, United States government bonds were a global safe-haven when conditions got rocky somewhere else in the world.  This rested upon the belief that the US government could and would pay its IOUs.[1]  It has been easy for the United States to find lenders willing to buy Treasury bonds at lower rates of interest than might otherwise have applied. 

The consequences have been good or bad depending on how you look at it.  Various benefits for the United States flowed from the belief in the reliability of American public credit.  For one thing, the willingness to lend has eased the cost of the big deficits and growing national debt.  Americans have not had to strike a balance between taxes and spending. 

Furthermore, for those individuals who rely upon credit purchases, buying a car, or a house, or a lot of stuff at Walmart has been cheaper.  The reverse of the medal here is that all those foreigners who wanted dollar-denominated bonds raised the value of the dollar relative to the currencies of those other countries.  These “strong” dollars made imports cheapish.  This, too, eased the cost of consumption.[2]  OK, where did these foreigners get the dollars to buy Treasury bonds?  They got them by selling cheap goods to Americans.  Then they buy US Treasury bonds, which raises the value of the dollar, which makes their goods cheaper for Americans and American goods more expensive for everyone. 

Along the way, all those cheap imports first undercut, then destroyed, much of America’s manufacturing base.  If all it had done was wreck the American production of teddy-bears, we could live with that.  However, many of the goods now produced abroad are things like pharmaceuticals, computers, information/communications technology, and automobiles.  Since joining the World Trade Organization in 2000, China has been the main predator stripping the bones of the non-financial and non-entertainment sectors of the American economy.[3] 

As the national borrowing has increased, the size of the debt has grown to very high levels.  The debt can be regarded as solid so long as the United States has the will and the means to pay the interest, at least, on it.  The share of the interest payments in government spending has grown in recent years.  Partly, this reflects the sheer volume of the debt; partly, it reflects the higher interest rates charged to control the inflation. 

However, what if the debt or the interest rate on the debt grow so large, that the interest payment exceeds what Americans are willing and able to pay?  This has been a continual and growing theoretical concern among economists and investors for many years.  People will lend so long as they believe that they will be paid back.[4]  If they lose confidence, then they will try to get rid of their government I.O.U.s.[5]  (I don’t recall hearing any of this discussed in presidential debates.)  It is possible that the recent “retreat” from bonds is the first tremor of an earthquake.    

Or perhaps not.  A large share of the small group controlling global business and financial resources (countries, companies, banks) really dislike the current American economic policies.  So is also possible that this is just a warning shot.  Will people attend to the warning? 

[1] Peter Goodman, “Trump Tariffs Shake Faith In the Safety of U.S. Bonds,” NYT, 14 April 2015. 

[2] Just for fun, go through all your stuff, from underwear to lap-tops and make a list of where everything comes from. 

[3] How do you fight a war with fictional “super heroes” dressed in Spandex and piles of money? 

[4] They will lend even when they suspect that they will not be paid back in full.  Under these conditions, they charge a “risk premium’ in the form of higher interest rates still.  Argentina, a notorious bad bet, pays high rates. 

[5] Maybe something like this.  Fire sale – Margin Call (2011) 

Ruthless.

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            Here’s the rot at the heart of the Republic: American voters of both parties have come to love “free stuff.”[1]  In a Democracy, politicians and political parties see the road to their own success running through giving voters what they want.  For Democrats, it means Tax-Spend-Elect; for Republicans it means Tax Cut-Spend-Elect. 

            As a result, in 2023, federal spending hit $6.75 trillion, with the federal deficit (not debt, just one year’s worth of spending above revenue) hitting $1.8 trillion.[2]  That deficit is 6.4 percent of Gross Domestic Product (GDP).  That isn’t a record.  It has been surpassed before.  However, those other peaks occurred during some kind of emergency: wars, recessions, etc.  Those conditions don’t apply at the moment. 

“Goo-goos” hate this trait.[3]  In the present day, all sorts of experts and commissions offer warnings of coming catastrophe and plans to avoid same.  The trouble is that this is like trying to talk a drunk into giving sobriety a spin.  It isn’t going to happen until they “hit bottom” or have a “moment of clarity.”[4]  What might bring on such a change? 

            Can you cut federal spending by shrinking the federal government?  YES!  And this idea is supported by a majority of Americans.[5]  Can you cut a LOT of federal spending simply by shrinking the number of civil service employees?  NO! 

First, the cost of salaries for all civil servants runs in the area of $200-$250 billion a year.  You will recall (from just above) that this year’s deficit is $1.8 trillion.  So, $200-$250 billion is about one-eighth of the deficit. 

Second, there’s interest on the debt at $882 billion.  An actual default, not just cuts to existing spending, may be coming.  We’re not there yet and we may be able to fend it off. 

Then there’s “discretionary” spending.  This includes the defense budget and everything else.  This comes in at around $2 trillion.  You can cut the defense budget a bunch.  You just have to believe that we are entering an era of peace and tranquility in which no other country will seek to challenge American interests. 

            Third, there’s the elephant in the room: “mandatory” spending on Social Security, Medicare/Medicaid, and related programs.  This amounts to $4.1 trillion, more than double “discretionary” spending.  “So taming mandatory spending means reining in benefits.”  Ouch! 

            It seems impossible for either Congress or the American people in their present state of desiring “free stuff” from the government to address this issue.  Nor will they raise taxes. 

However, there is scope for executive action.  For example, one “Goo-goo” estimate suggests that as much as $1.4 trillion could be saved by reversing Biden administration executive actions.  All we need is a ruthless lame-duck president who doesn’t care about established traditions or Beltway verities or even what he may have promised to get elected. 

[1] This has become a cultural force.  How and why this has happened is worth exploring. 

[2] Greg Ip, “Cutting Deficits Is Easy—Just Unpopular,” WSJ, 27 December 2024. 

[3] See: Goo-goos – Wikipedia 

[4] You might think that the recent unpleasantness with inflation fueled by deficits would have awakened ordinary Americans to this issue.  It doesn’t seem to have done the trick.  Or perhaps the pre-existing interest groups and political habits were just too strong for a not-yet-crystalized change of attitude.   

[5] According to an Ipsos poll, 57 percent of Americans favor downsizing the federal government.  “Poll Watch,” The Week, 6 December 2024, p. 17. 

“The System Is Blinking Red” 1.

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            The Congressional Budget Office (CBO) is required to report on the state of public finances.[1]  The CBO offers credible long-term projections.  They project an average annual growth of 2 percent.[2] 

            In 2001, U.S. government debt held by the public was $3.3 trillion dollars, amounting to 33 percent of Gross Domestic Product (GDP).  Adjusted for inflation, that would be $5.93 trillion in 2024 dollars.

            In 2024, U.S. government debt held by the public is $28 trillion, amounting to 99 percent of GDP.  So the debt has multiplied almost five-fold in real terms, while it has tripled as a share of GDP.  The national debt is growing faster than is the American economy.   

            In 2035, U.S. government debt held by the public is projected to surpass $50 trillion, amounting to 122 percent of GDP.  By 2054, U.S. government debt held by the public is projected to surpass $50 trillion, amounting to 166 percent of GDP.  To further complicate matters, the “reserves” of Social Security are forecast to run out by 2033; the “reserves” of Medicare are forecast to run out by 2036.  Then the federal government will assume responsibility for making up any difference between assets and obligations. 

            From the mid-Seventies to today, interest payments on the national debt averaged 2.1 percent of GDP.  In 2024 it is 3.1 percent of GDP.  In 2033 it will hit 4.1 percent of GDP.  This latter figure is highly optimistic because it assumes that the Trump administration tax cuts of 2017 will expire in 2025.  There is virtually no chance that this will happen.  The interest payment on the debt is growing as a share of GDP. 

            Why does this ballooning debt matter?  The United States government has been cutting taxes and increasing spending for a long time now.  Nothing bad has happened.  Yet.  Many people may assume that creditors will go on lending the government of the United States whatever it needs to fill the deficit.  This is not necessarily so.  While vast, the pool of global savings available to be borrowed by the United States is not infinite.  As the debt grows in tandem with America’s unwillingness to accept fiscal discipline, lenders may conclude that there is a mounting risk of at least partial default.  Rather than stopping lending at all, they may demand a “risk premium” in the form of higher interest rates.[3]  The point of the higher interest rates is for the investor to recover as much of his/her capital as possible before anything goes wrong.  Higher interest payments will crowd-out other spending categories from the budget. 

            This began as problem-solving or vote-buying in an earlier time.  People in both parties now are used to the government giving them things without any immediate cost.  Politicians who argue for austerity—lower spending, higher taxes—will lose elections.  Many people think that this is pathological.  Hard to be puritanical when Puritanism is culturally discredited. 

[1] William A. Galston, “A U.S. National Debt Crisis Is Coming,” WSJ, 18 September 2024.  Sources: Part 1 of Answers to Questions for the Record Following a Hearing on An Update to the Budget and Economic Outlook: 2024 to 2034 (cbo.gov) and Part 2 of Answers to Questions for the Record Following a Hearing on An Update to the Budget and Economic Outlook: 2024 to 2034 (cbo.gov)

[2] By my own calculation, the American GDP grew by 58 percent between 2001 and 2023.  That averages at 2.5 percent per year.  However, the turn against globalization could slow growth everywhere.  GDP (constant 2015 US$) – United States | Data (worldbank.org) 

[3] See: Risk premium – Wikipedia