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Today’s entry: Brian. I heard last week that we are now borrowing money to pay the interest on the national debt. Have you heard anything about this? Thanks
Bottom Line: Well, there’s not a lot of good news when it comes to our national debt, but the good news is what you heard isn’t correct. If it were it’d be time to hold on to our butts, or freakout, or whatever would be appropriate to do would be when the United States would become insolvent. The country, as it applies to our federal debt, is a lot like you or me when it comes to racking up debt. We can accumulate debt, and sustain it, provided that we’re able to meet the minimum monthly payment requirements to service it. In our own lives, when there’s no longer enough money coming through the door to pay the monthly bills, that’s when stuff starts to hit the fan. In the case of the country – the same would be true as well. Thankfully, the United States hasn’t arrived at insolvency, which would be the case if we were attempting to borrow money just to attempt to service our debt. At least yet.
The past couple of years have been record setting for both the amount of federal spending flying out the door, and the amount of debt we’ve taken on to do it. In real-time the US national debt has soared above $30 trillion. A number so large none of us can really comprehend it. By way of comparison, the most valuable American company, Apple, is worth about 2.4 trillion. In other words, it would take the equivalent of about thirteen companies the size of Apple (which don’t exist), just to extinguish the debt we’ve managed to accumulate. Still, to most people it doesn’t seem real because it’s not something we see, feel, or touch... Although it does impact something we see, feel, touch and use daily. The value of the US Dollar. The stronger the health American economy is, the stronger the US Dollar is. The stronger the Dollar is, the more stuff you can buy with them. As we’re fighting 41-year high inflation, the strength and the value of the US Dollar directly impacts and influences it. The more debt the US economy takes on and the more strain there is with our ability to repay it, the weaker the US Dollar is, and it contributes to a higher inflation rate as it takes more of them to buy the same stuff. But I’ll save that part of the conversation, because that’s a whole other rabbit hole, for another day. Specific to our ability to service our national debt, here’s the scorecard.
For fiscal year 2021:
- Total federal budget spending: $6.8 trillion
- Total federal revenues: $3.8 trillion
- Total federal deficit: $3 trillion
So aside from taking on trillions in additional debt spending. That basic breakout is helpful. The federal government took in $3.8 trillion in revenue. That’s how much could be spent without going further in the hole. So how much did it cost us last year to service the national debt?
- $413 billion
That’s one heck of a credit card payment, but what you might have noticed is that it’s a lot less than what came in the door. The total debt service amounted to about 11% of total revenue last year. To give you an idea of how this compares to individuals and businesses, a minimum coverage ratio of 125% is what’s considered acceptable. In other words, you should have 25% additional money coming through the door than is necessary to meet your minimum obligations. Clearly the country is well within that threshold. But here’s the bigger concern. The federal government has minimum obligations which are considerable. Most recently, 61% of federal spending is considered “essential spending”. This means meeting the minimum obligations of this country accounts for most of what’s being spent. This is likely what you heard being referenced. 61% of last year’s spending amounted to $4.15 trillion. In other words, just the spending considered essential exceeded our country’s revenue last year. Clearly, that’s not good. Now, aside from being able to easily pay the debt service with revenue coming into the country, the reason this reality isn’t considered insolvency, is due to the ability of Congress and the president to change laws as necessary to redefine what’s “essential”. This is where some of the longer-term solvency concerns regarding programs like Medicare and Social Security can eventually come into play.
The one other less than awesome reality is that as the Federal Reserve raises interest rates and thus increases the cost of variable rate debt, it increases the cost of the federal government to service its debt as well. The bottom line is that just like debt in our own lives, all of this works until it doesn’t. For now, it works, but the longer this trend plays out the more compromised the choices will be in the future for our country.
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