Sunday, January 2, 2011

Unstoppable-The Federal Debt Train

I saw the movie "Unstoppable" the other night. The movie is about a runaway train flying through Pennsylvania with a cargo of hazardous materials. Denzel Washington and Chris Pine are the everyday RR guys that take it upon themselves to attempt to stop the train before it wreaks havoc.

Watching the movie I could not help but think about another seemingly unstoppable, runaway train-our federal debt.

A fact that is not well known is that despite the enormous amount of spending and the additional debt we have incurred over the last several years, the interest on the federal debt is actually down. How can that be?  Simple.  Interest rates are much lower largely due to Federal Reserve policy.  In addition, a lot of the debt is being purchased by the Fed essentially out of thin air.   The Fed now holds over $1 trillion of U.S debt.  To put this in perspective, the Chinese hold about $900 billion.  These actions have resulted in significantly lower interest costs despite much higher total debt levels.  This is great now but it portends potential disaster ahead if we don't get our fiscal house in order.

This is how the Congressional Budget Office describes it in its December 2010 report on Federal Debt and Interest Costs

Although the federal government has increased its net borrowing by more than $3 trillion in the past two years, net interest costs dropped from $253 billion in 2008 to $197 billion in 2010 because of remarkably low interest rates. The amounts of net interest shown in the budget include interest paid on all Treasury securities ($413 billion in 2010), minus the portion of that interest that is received by trust funds ($186 billion in 2010) and the net amount of other interest received by the government ($30 billion in 2010). The last category consists primarily of net receipts to the Treasury from the financing accounts for federal loan programs (those accounts are not included in the federal budget).

That's the good news.  The bad news...CBO is forecasting a $600 billion increase in interest costs (a four fold increase) due to more debt and higher interest rates by 2020.  Bear in mind that this projection assumed that the recent tax cut and unemployment benefit extensions would not be enacted.  How much is $600 billion? We will spend about $450 billion on Medicare in 2010.   We are not talking about spare change here!

In CBO's most recent projections, which assume that current laws remain the same, annual deficits decline from the $1.3 trillion recorded in 2010, but the cumulative deficit from 2011 through 2020 exceeds $6.2 trillion. Borrowing to finance that deficit--in combination with an expected rise in interest rates--would lead to a fourfold increase in net interest payments over the next 10 years, from $197 billion in 2010 to $778 billion in 2020. As a percentage of GDP, net interest outlays would more than double during that period, rising from 1.4 percent to 3.4 percent.

This is a train wreck waiting to happen. We need some real life heroes to stop this runaway train. Who is it going to be? I have high hopes for Rep. Paul Ryan (R-Wis) the new Chairman of the House Budget Committee. He has been one guy who has not been afraid to talk straight and to put tangible plans on the table. However, it is easier to talk than to govern. We need some heroes who are willing to try to stop the train before it is too late for all of us. Will Paul Ryan have the right stuff?

1 comment:

  1. A critically important issue that is often hard to comprehend because of its size and scope. Thanks for putting this in a clear context that everyone can grasp. - R