Right after Israel’s war with Hamas erupted, Secretary of the Treasury Janet Yellen was asked whether the US can afford to provide military aid to Israel while, at the same time, continuing to give massive aid to Ukraine. Her reply: “Absolutely.”
The question was strange. On the one hand, it was intelligent and timely, but what did the interviewer expect Yellen to say? That the US can barely pay for the commitments it has already made?
I Owe, I Owe
Despite the hot war in the Middle East, the US national debt continues to get lots of attention - and for good reason. The government keeps borrowing money, disregarding the warnings of experts. And now it needs to borrow money more frequently. Is the government losing control of the economy? There are whispers to this effect out there and now they’re starting to grow louder.
Since March 2022, the Fed has raised rates 11 times to slow inflation, according to Fortune. In 2022 the yield on the 10-year Treasury was just 0.5%. But in October, it briefly topped 5% – the highest in 22 years. And everyone from Wall Street to Main Street is being affected because they’ve already caused soaring rates on mortgages, credit cards, auto loans, and much more. And some gurus are predicting rates will continue to rise.
Funding Two Wars
Spending on defense, Social Security, health, and related programs are generally considered essential. But now the government may have to help fund two wars, which will add to the deficit, pressure interest rates, and possibly roil markets.
When the Russia-Ukraine war broke out on February 24, 2022, it was expected that Russia would score a quick and decisive victory. But the war has already lasted much longer than anyone ever predicted, has cost much more, caused more deaths and casualties, and has spiked global tensions.
The war could not have lasted this long without the financial, military, and political support of numerous countries, primarily the US. But can the US keep funding Ukraine’s war? And how much assistance will Israel need? These are just a few of the questions investors and others will be asking in the coming weeks.
“The US national debt is literally out of control,” CPA Lena Petrova believes. “There will be no debt ceiling until 2025 and we’re likely to see another surge in spending as the US is preparing to fund two armed conflicts.
“Government spending keeps fueling inflation,” she adds. “This is the same inflation that the government’s central bank is trying to bring down to its target rate of 2%. Many believe this is an unattainable goal in these circumstances.”
If inflation continues to race ahead, ordinary people will be the ones hurt the most. Many people would agree to increased government spending for health, infrastructure, and other programs from which they’ll benefit directly, but giving still more aid to Ukraine and now to Israel may be too much for some to handle.
The public may not be aware of how quickly the government’s debt is growing, but very recent statistics make this clear. In October, the US national debt was $33.68 trillion. But in June, just a few months before, it was $32 trillion – a very major increase. As debt grows, so do the interest payments owed on it – and the debt is increasing really fast.
According to Petrova, the interest on this debt is already over $1 trillion a year. Paying for interest on debt was easier a few years ago, in part because the debt was somewhat lower but also because rates were significantly lower. In other words, the national debt is becoming much more expensive to finance.
In mid-October, the yield on the 10-year Treasury briefly touched 5% – the highest it’s been since 2007, and four percent higher than it was just three years ago.
Higher yields have the obvious drawback of making it more expensive to borrow money. But there’s another side to the story that’s easy to overlook. Higher rates also make it easier for the government to borrow and finance their spending. And in that sense, she suggests, the government may actually want yields to rise.
The Committee for a Responsible Federal Budget is a non-profit organization that focuses on the federal budget and supports reduced government spending. Recently, it warned that the US could fall behind other developed nations if its spending is not controlled. An additional $600 billion was added in October alone. As interest payments that must be paid are increasing there is simply less money available for quality of life and other important programs.
According to the Committee, interest on national debt will exceed defense spending by 2028. And if interest rates continue to rise that could happen even sooner. In the coming decades the Committee predicts interest payments on the national debt will grow faster than on any other part of the federal budget.
The Clock Keeps Ticking
The US National Debt Clock is very accurate, but it doesn’t tell time. Instead, it tracks America’s gross national debt. It also highlights the top 4 budgetary items. The top 3 today are Medicare/Medicaid, Social Security and Defense. The 4th largest item is interest on debt, but this one is increasing fastest of all.
Interest expense on defense already accounts for 81% of defense spending; and while it’s lower for Medicare/Medicaid, at 45% it’s by no means insignificant. And there’s no indication that government borrowing will slow any time soon.
In Petrova’s opinion, one of the biggest problems with the current level of spending is that it’s unsustainable. “Tax revenues have been declining, and the more difficulties businesses and consumers face, the less tax revenues the government is likely to collect in the future.”
The bottom line is that the US is in a difficult situation that is steadily becoming more complicated: It has to borrow more to fund ongoing needs, but doing that will only make the interest it has to pay even higher. There’s also a related problem: what if a black swan problem unfolds and the government, taken by surprise, will have to spend heavily?
This is a difficult predicament. Here are two questions investors may want to consider: How does one preserve wealth in this environment? An even tougher one is how does one survive financially in this environment? Who said it’s easy to be a financial advisor?
Sources: abcnews.go.com; bloomberg.com; cbsnews.com; fortune.com; foxnews.com; zerohedge.com