After an unexpectedly hawkish Federal Reserve raised interest rates by 75 basis points for the third consecutive time last week, all eyes were on markets and the economy. Few, however, paid attention to the effect persistent inflation and higher interest rates will have on Uncle Sam.
That’s surprising. Gross interest expense on the national debt hit $88 billion in August according to the Monthly Treasury Statement. That’s a stunning annualized rate of $1.06 trillion. Interest on the national debt is exploding and heading toward what economists refer to as a “doom loop”—the vicious cycle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing.
The August numbers barely reflect the impact of the Fed’s interest-rate hikes between March and July, much less last Wednesday’s increase and the additional 1.25% by year’s end implied by the Fed’s new guidance.
The Fed’s more-hawkish guidance calls for “higher rates for longer,” even if it brings on recession.
Not only are rising interest rates driving up federal interest expense dramatically; inflation is propelling growth in government spending on Social Security benefits, Medicare and other government healthcare programs.
Naturally, if we do slip—or plummet—into a serious recession, federal income tax revenue will erode. Even before recession, the last nine months of declining stock and bond markets virtually assure an almost complete collapse in capital-gains-tax revenue.
The national debt is working like a cancer sapping the nation’s long-term economic vitality.