top of page

America's Debt Crisis: The Financial Abyss

The US is on the verge of a tightening debt spiral that will have social and political ramifications.
The US is on the verge of a tightening debt spiral that will have social and political ramifications.

Introduction


Imagine discovering that your neighbor, who appears to live comfortably in a nice house and drives a new car, is actually spending 35% more than they earn each year, using credit cards to cover the difference. Now, imagine your neighbor managing your retirement, healthcare, and kids' futures. This isn't just a hypothetical scenario – it's the reality of America's federal finances in 2024.

The numbers tell a sobering story. Our federal debt has exploded from $22.7 trillion in 2019 to $34.1 trillion in 2024. A staggering 50% increase in just five years. But more alarming than the rise in total debt is the rapid acceleration of interest payments, which have more than doubled from $375 billion in 2019 to $870 billion in 2024. This isn't just about numbers on a spreadsheet anymore—we're facing a genuine crisis threatening our nation's economic foundation and future.


The Tail Wagging The Dog


The path to our current predicament wasn't inevitable. Instead, it was paved with a series of decisions that seemed rational in isolation but created a perfect storm when combined. The story begins with the era of zero interest rates, a period that fundamentally altered how we think about debt and spending.


Following the 2008 financial crisis, the Federal Reserve kept interest rates near zero for an unprecedented length of time. This policy, while helpful in stabilizing the economy during crisis periods, created what economists call "moral hazard"—a situation where the government became accustomed to borrowing with virtually no immediate consequences.


Like a family taking advantage of 0% credit card offers without planning for when those rates expire, the federal government accumulated massive debts while interest costs remained artificially suppressed.

Federal Reserve Economic Data (FRED) shows our apparent penchant for spending.
Federal Reserve Economic Data (FRED) shows our apparent penchant for spending.

The Federal Reserve Economic Data (FRED) tells this story clearly. Looking at the federal expenditure chart, we see a steady climb that accelerates dramatically around 2020. This wasn't just about pandemic spending – it represented a fundamental shift in how we approach fiscal policy. During this period, the government didn't just spend more but also normalized trillion-dollar deficits even during periods of economic growth.


This brings us to the most troubling aspect of our current situation—the debasement of our currency through the most aggressive money printing in history. When the government needs money beyond what it collects in taxes, it has two options: borrow or print. Increasingly, we've chosen both—borrowing massive sums while simultaneously creating new money to help manage the debt burden. This approach, while politically expedient, has begun to show its costs in both inflation and rising interest rates.


Understanding the Numbers


To grasp the true scale of our national debt crisis, let's translate the government's finances into terms we'll understand—Household finances. In 2024, the federal government expects to collect $5.1 trillion in revenue while planning to spend $6.9 trillion. Using our household analogy, this is equivalent to a family earning $51,000 annually while spending $69,000 – putting $18,000 on credit cards annually.


But here's the problem: $870 billion of the government's annual spending goes solely to interest payments. In our household example, that's like spending $8,700 – 17% of your annual income on credit card interest.

The primary source of our government's revenue is taxes.
The primary source of our government's revenue is taxes.

The FRED charts paint an alarming picture of this reality. While tax receipts (our national income) have grown, spending has consistently outpaced it. More troubling is the recent vertical climb in interest payments. A curve that looks eerily similar to what credit counselors would call a "debt spiral."


The Ticking Time Bomb


Beneath the surface of these already alarming numbers lurk an even greater danger. The first is our debt's maturity structure. This is when our loans come due. A significant portion of government debt must be refinanced in the next few years but under very different conditions than when it was initially borrowed.


Remember that zero-interest-rate era? Well, the government loaded up on debt with historically low rates, and now, as these debts need to be rolled over, they're being refinanced at rates that are three to four times higher.

Unfortunately, this is a lagging metric. Meaning the worst is yet to come.
Unfortunately, this is a lagging metric. Meaning the worst is yet to come.

Think of it like an adjustable-rate mortgage that's about to reset--except on a $34 trillion scale. The interest payment chart from FRED shows the beginning of this process, with payments rising almost vertically as higher rates begin to bite. This isn't just a temporary spike but the start of a structural shift that could dominate our national finances for decades.


Kicking off a vicious cycle of a classic debt spiral: inflation rises with the diffusion of our newly printed capital (more money in the economy), causing costs of everyday goods and services to increase. To combat this inflation, the Federal Reserve has to raise interest rates to cool the red-hot economy. Higher interest rates cause borrowing costs to rise, increasing annual debt. Returning us to the two methods to make up the deficit → borrowing or printing. We do not want to print due to inflation, and borrowing becomes too costly. Entering us into a rock and a hard place.


Adding to this challenge is the demographic time bomb. As Baby Boomers continue retiring, Social Security and Medicare obligations are set to increase dramatically, creating even more pressure on an already strained system. This isn't a far-off problem, it's happening now, and the numbers show it clearly in the steady rise of federal expenditures.


The Structural Challenge

What makes this situation particularly dire is its structural nature. This isn't a temporary emergency that will resolve itself with our current economic growth. Unlike previous periods where interest payments remained relatively stable or grew gradually, we're now seeing an exponential increase that threatens to consume an ever-larger portion of our budget. 2024 alone should see roughly 13% of our budget going to interest payments.


The math is simple but brutal: when interest payments grow faster than tax revenues, an ever-increasing share of national income must go toward servicing debt rather than providing government services. This creates a vicious cycle where higher debt leads to higher interest payments, which leads to more debt, and so on.


Looking Forward & Paths to Sustainability


The path forward is narrow but not impossible. Like a household facing serious credit card debt, the solution requires a combination of increased income, reduced spending, and smart debt management. Although, the scale and complexity of federal finances make this far more challenging than a household budget adjustment.


These are current and projected Tax Revenue for 2024. Last Updated: July 31, 2024
These are current and projected Tax Revenue for 2024. Last Updated: July 31, 2024

First, let's look at revenue. While at historically high levels, the federal government's tax receipts haven't kept pace with spending growth. Tax receipts show periodic peaks and valleys, but the overall trend hasn't matched our expenditure growth. Any serious solution must address this gap through economic growth, tax policy changes, or likely both.


On the spending side, the challenge is even more daunting. Unlike a household that can simply cut back on discretionary purchases, roughly 70% of federal spending is considered "mandatory" – including Social Security, Medicare, and interest payments. The remaining 30% includes essential services like national defense, infrastructure, and research. There's no painless way to close a $1.8 trillion annual deficit. We're going to have to get very creative to address this issue.


Conclusion: The Crossroads


America stands at a crucial fiscal crossroads. The data presented in the FRED charts tells a straightforward story: our current path is unsustainable. The exponential growth in both total debt and interest payments, combined with structural deficits and demographic challenges, points to a future of increasingly difficult choices.


The good news, if we can call it that, is that we still have time to act. Unlike a household that has already missed payments and damaged its credit score, the United States still maintains its prime credit rating and the dollar's status as the world's reserve currency. However, these advantages aren't guaranteed, and BRICS nations already challenge these privileges due to our current path.


The solutions will require political courage and public understanding. We need a serious national conversation about fiscal sustainability beyond partisan talking points. Just as a family facing financial difficulties needs to have honest discussions about spending and savings, our nation needs to confront these challenges head-on.


The stakes couldn't be higher. Our decisions in the next few years will determine whether we begin to reverse course or continue accelerating toward a fiscal crisis. The charts and data show us where we're headed. Now it's up to us to decide if that's where we want to go.



Appendix


The last 25 years of debt:


תגובות


Drop Me a Line, Let Me Know What You Think

Thanks for submitting!

© 2022 by PM-Notebook.

bottom of page