Boomergeddon Watch: Higher Interest on Debt

Graphic credit: Wall Street Journal

Today’s Wall Street Journal editorial page explores the ramifications of the Federal Reserve’s decision to dial back years of Quantitative Easing and near-zero interest rates. Higher interest rates will translate directly into higher debt payments for the world’s largest debtor, Uncle Sam.

Interest on the debt rose $28 billion for the six months of fiscal 2017. Annualized, that amounts to $56 billion in a budget that is running a $522 billion deficit this year

During the era of Quantitative Easing the Fed purchased trillions of dollars of financial assets, the profits on which were remitted back to the U.S. Treasury. That amounted to a gift of between $50 billion and $70 billion or so above typical remittances of the pre-QE era. As the Fed unwinds QE and disposes of its assets, those remittances will decline as well, creating a double-barreled shot to federal budget deficits. Between higher interest payments, lower remittances and the structural imbalance of spending and revenue, increasing federal deficits are on auto-pilot. Not a single additional dollar of spending increases or tax cuts is necessary to push the nation toward fiscal crisis.

The Trump administration has different budgetary priorities than the Obama administration — it wants to increase defense spending while cutting domestic spending — but it appears to be no more serious about attacking deficits than was the Obama administration. Insofar as there seems to be a fiscal policy, it amounts to cutting regulations, reforming the tax structure and protecting American jobs from foreign competition in order to boost economic growth. In theory faster growth will generate a gusher of tax revenue that will more than make up for the tax cuts.

In my humble appraisal, dialing back regulations and reforming the tax code will stimulate economic growth, but not by a miraculous amount. The U.S. economy faces strong headwinds of an aging workforce, stagnant productivity, runaway education and health care costs, a spread of social dysfunction from the lower class to the working class, massively underfunded pensions, and fragile overseas economies. The global economy is more heavily leveraged with consumer, business and government debt than at any time in peace-time history and remains extraordinarily vulnerable to black swan events. Boomergeddon is coming. The only question is whether it takes fifteen years or twenty to get here.

Implications for Virginia. The Old Dominion is more dependent upon federal spending than almost any other, and we have more to lose than most from a federal fiscal and monetary meltdown. We need to diversify our economy, we need to bullet-proof the balance sheets of our state and local government, and we need to re-think how we deliver core government services more cost-effectively. Indeed, we should strive to be not merely resilient in the face of federal budgetary disaster, that is, in a position to survive a Boomergeddon scenario, but to be, in the words of Nassim Nicholas Taleb, “anti-fragile,” that is, in a position to actually thrive amidst a federal fiscal crack-up.

How could Virginia prosper while the rest of the country descends into fiscal anarchy? Simple: by preserving the ability to maintain core government services like roads, education, health care and public safety while other states experience fiscal insolvency and disintegrating services. Corporate capital and human capital will flee to the oases of order and sanity. Think of California during the Great Depression. Think of Switzerland today.

I acknowledge that it’s difficult to act upon projections of what might happen 15, 20 or 25 years from now. Indeed, many will accuse me of gloom-mongering. But I have read enough history and experienced enough history to know how rapidly things can change. Everything is fine… until it’s not. And then we’ll wish we’d heeded the warning signs.

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8 responses to “Boomergeddon Watch: Higher Interest on Debt

  1. I think it was Sunday’s TD that had in one section, Commentary, two stories and one letter to the editor about the horrors, horrors that would result if Trump’s proposed domestic budget cuts were to be accepted. More such stories today. Slash, burn, scorched earth, dead piling up in the sidewalks – the predictions grow more dire by the day (over a budget bill that was immediately declared DOA by many in Congress.) None of the stories talked about the deficits or the debt we are laying on our grandchildren, let alone the multiplier effect of rising interest rates. We want what we want, we want it now, and we are fine with making future generations either pay or default….I don’t think you are too gloomy at all!

  2. I agree with Steve that you are right about this.
    I’m bothered to see: “a spread of social dysfunction from the lower class to the working class.” That kind of judgemental and divisive view – seeming to say that only lower and working class people have the problems – is part of what’s hurting us. I don’t think social problems are in any way limited or even primarily related to the “lower and working class people.” Consider some of the actions of some of the highest earners in the US! It’s not fair to say that we’d all be OK if only “they” changed.

    • I don’t mean to imply that “social dysfunction” is limited to the poor and working classes. Certainly there are cases of really screwed up rich people! But broadly speaking, social problems like broken marriages, out-of-wedlock births, substance abuse, males dropping out of the workforce, and so on, are far more prevalent in lower-income groups than among affluent groups. Charles Murray thoroughly documented the phenomenon a couple of years ago in “Coming Apart,” and the problem has been highlighted by recent news stories talking about the decline in life expectancy among lower-income whites due to “death by despair” — opioid abuse, suicides, alcoholism, etc. The fraying of America’s social fabric is spreading. Once upon a time people could say, “That’s a black problem,” or “that’s a Hispanic problem.” No longer. It’s a white problem, too.

      • Stop apologizing. What you said (in context) is true. If you look at every American you could make a determination as to whether they were a “maker” or a “taker”. Makers pay more in taxes than they consume in fully allocated government benefits while takes consume more in fully allocated government benefits than they pay in taxes. This is essentially simple math. I know snowflakes hate this reality but it is no less real based on their hate.

        You can look at deficits as either too many takers or the makers paying too little or some combination thereof. You feel like the ranks of the takers have swollen to include former makers in the middle class. Qualitatively, I suspect you are right although I don’t have any quantitative data to support my suspicion. Your comment about social dysfunction is also legitimate. Whereas the inner cities once were considered the epicenter of social dysfunction rural areas now have now entered the competition for queen of the dysfunction parade with meth, heroin and oxy addiction reaching epidemic levels. While wealthy people have these problems too they are … well … wealthy. Hence, their problems don’t translate as directly into entitlement payments that swell the deficit.

        If your comments inflame triggered snowflakes so be it. My contention that the US Civil War was, in fact, centered on the issue of slavery certainly inflames the alt-cntl-delete reboots of the right wingnut camp.

  3. re: ” The Trump administration has different budgetary priorities than the Obama administration — it wants to increase defense spending while cutting domestic spending — but it appears to be no more serious about attacking deficits than was the Obama administration.”

    well that’s total 100% baloney. Obama is the one who did the sequester.. that now they want to break. And don’t be giving Trump credit for something they have shown no inclination to do .. in fact.. no clue about it to start with.

    Finally – it’s Congress that sets the budget and they are the ones who set the deficit.. and you can’t increase spending for defense without increasing the deficit unless you’re gonna cut entitlements. That’s the simple reality and to this point we’ve not seen a principled budget proposal from the folks who say they want to do that. Trump to this point doesn’t know a turnip from a cow pie.. not saying one day he might but right now anyone who thinks he has a cogent approach to the budget is smoking some good stuff!

    Finally what does the budget and the deficit have to do with social dysfunctionality? How did we make that jump?

    • Obama did the sequester? Yeah, because that’s what it took to avoid shutting down the government. The sequester was a gambit, a bluff — he never thought the Republicans would accept it. But they did.

      As for social dysfunction and the budget. Social dysfunction is directly responsible for increased welfare spending — food stamps, Medicaid, WIC — not to mention increased spending for schools and a lot of other stuff.

      • It don’t matter what we think HE thought. The REALITY is that BOTH he and Congress DID agree and it does take BOTH of them to agree – and that agreement required cuts to BOTH entitlements AND the military.

        Trump is big on talk and so far does not seem to have a clue about how
        to get a budget through Congress , not that Congress has been able to do anything other than CRs itself.

        but the bottom line is – as you point out – we have a deficit – and yet we have folks who want to spend even more on the military without ever mentioning HOW they’d do that without making the deficit even greater.

        social dysfunction is the reason we have a deficit? How does that work for other countries?

    • “Finally what does the budget and the deficit have to do with social dysfunctionality? How did we make that jump?”

      You’re intellectually dyslexic. The budget and deficits don’t cause social dysfunctionality. Social dysfunctionality causes deficits. The larger the percentage of Americans who are dysfunctional the higher the entitlement payments and the larger the deficits.

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