ARMed and Dangerous at the U.S. Treasury

The U.S. government’s 2023 fiscal year ends at the end of the month.  Does this excite you?

It should.  Assuming you care about the reliability of your dollar-based savings, investments, and what Uncle Sam does with the taxes you pay.

The Treasury won’t release the full fiscal year statement until mid-October.  Though, it appears the 2023 fiscal year deficit will be just under $2 trillion – nearly double last year.

Why is there such a gaping deficit at a time when there’s low unemployment and economic growth?  Is countercyclical stimulus spending now the standard operating procedure of the U.S. government?  What would happen if all this deficit spending was eliminated?

This week the Treasury released the spending tally through the first 11 months of the fiscal year.  Over this period, the federal government has taken in $3.97 trillion in receipts.  However, it has spent $5.49 trillion.  The cumulative deficit through 11 months is over $1.5 trillion.

Of the 11 months reported so far, there were deficits for every month except April and August.  In April, following the collection of individual income tax returns, the federal government eked out a surplus of $176 billion.

Yet this did little good.  The $176 billion surplus in April came on the heels of a $378 billion deficit in March.  And it was followed by a $240 billion deficit in May.  In other words, the annual April income tax collection hubbub did little to square the Treasury’s books.

In August, the federal government recorded an $89 billion surplus.  This surplus is a function of the drop in outlays from the student-loan program, which was recorded in August.

Without the benefit of the $319 billion debt relief reversal modification of the student loan program, the August deficit would have been $230 billion.  You can thank the Supreme Court for striking down President Biden’s student loan forgiveness plan for the rare monthly surplus.

Regardless, the fiscal year-to-date monthly deficits overwhelm any surpluses by $1.5 trillion.

Rack and Stack

Deficits, remember, get racked onto the national debt.  Month after month.  Year after year.  They’re piled up like layers of waste cake at the municipal dump.

At current count, deficits have stacked up to a total national debt of nearly $33 trillion.  This amounts to over $98,000 per citizen.  But that’s nothing…

Unfunded liabilities – including social security, Medicare Parts A, B, and D, federal debt held by the public, and federal employee and veteran benefits – currently stand at nearly $194 trillion.  In total, this comes to over $577,000 per citizen.

As you can see, Washington’s spending is completely out of control.  Yet, it’s only going to get worse.  Here’s why…

One of the outlays in the Treasury statement is something called net interest.  This is the amount the Treasury pays to service the debt.

According to the Peter G. Peterson Foundation, in fiscal year 2022, the federal government spent $476 billion on net interest costs on the national debt.  That total, a 35 percent increase from $352 billion in 2021, was the largest amount ever spent on interest in the budget.

Through the first 11 months of the 2023 fiscal year, net interest is $630 billion.  So, it has already exceeded the largest amount ever spent in the budget by $154 billion, and there’s still one month in the fiscal year to go.

What’s more, net interest is nearly equivalent to other big spending categories.  For example, through the first 11 months of the 2023 fiscal year, outlays for national defense and Medicare are at $736 billion and $730 billion, respectively.

Net interest is over 2.4 times the $259 billion that has been spent on veterans’ benefits and services.

Net Interest Apocalypse

The top spending category – social security – has outlays of $1.24 trillion through the first 11 months of the 2023 fiscal year.  This is followed by health, which includes outlays of $812 billion.

After national defense ($736 billion) and Medicare ($730 billion) comes income security, which includes outlays of $716 billion.  Income security, if you’re unfamiliar with the term, includes programs like food stamps, disability, and unemployment.

The outlays in these spending categories are all rather massive.  Moreover, these all contribute to the mega deficit.

Nonetheless, these are all categories Congress has some ability to constrain; though, at present, and even with a looming government shutdown at the end of the month, this is something Congress has been incapable of doing.

Net interest, however, is now out of Congresses hands.  The daring representatives, through dereliction of duty, gave up control of the net interest budget category long ago by running up such an insurmountable debt.

Specifically, interest costs, which are already growing by leaps and bounds, will soon become the largest category of spending in the federal budget – even larger than social security.

The critical reason for the net interest apocalypse is rising interest rates and the gargantuan amount of debt the Treasury will have to roll over at higher rates over the next 12 months.

Torsten Slok, chief economist Apollo, recently noted that a total of $7.6 trillion of publicly held, outstanding U.S. government debt will mature in the next year.  The 2-year Treasury note currently yields about 5 percent.  Three years ago, its yield was 0.14 percent.

Do you see the looming Disaster?

Anyone with half a brain knew the ultra-low interest rates of 2020-21 wouldn’t last.  Homeowners, for example, took advantage of historically low interest rates to lock in 30-year fixed-rate mortgages at just 2.65 percent.  Today, 30-year fixed-rate mortgages are over 7.5 percent.

Somehow, the eggheads at the Treasury missed the opportunity of a lifetime.  In 2020, the Treasury could have locked in interest rates on outstanding debt for the next 30 years, when the 30-year Treasury bond was yielding less than 1.5 percent.

Instead, like house buyers in the early 2000s, the Treasury opted for the short-term teaser rate.  And now, given the need to roll over $7.6 trillion of debt at massively higher rates, the Treasury has subjected U.S. taxpayers to what amounts to an Adjustable-Rate Mortgage (ARM) on government debt.

ARMed and Dangerous at the U.S. Treasury

When ARMs reset in 2008, those who were sucked in by the low teaser rate quickly found they were unable to pay their mortgages.  They lost their homes.

The Treasury, however, has the full faith and credit of U.S. taxpayers backing its reckless decisions.  What this means is that as the interest rate on government debt resets higher, taxpayers – including you – will be laboring for the primary purpose of paying net interest.

Moreover, as the Treasury rolls over this $7.6 trillion debt over the next 12 months, interest rates will likely climb even higher.  This will be determined by who will buy the debt and at what price.

At this point the Federal Reserve cannot be counted on to buy the debt and artificially suppress interest rates like it has done in the past.  In fact, the Fed is currently reducing its holdings of Treasuries by about $60 billion per month.

Similarly, commercial banks are letting their Treasuries mature to free up cash to offset deposit withdrawals.  No one else wants to succumb to the fate of the now defunct Silicon Valley Bank.

What interest rate is needed for Treasuries to move from reward free risk to risk free reward?

If this week’s consumer price index report is any indication, the yields on Treasuries will go higher.  The latest CPI reading, in case you missed it, showed consumer prices increased at an annual rate of 3.7 percent in August.

Inflation, remember, starts with the expansion of the money supply.  On the monetary policy side, the Fed, after more than a decade of reckless abandon, is contracting its balance sheet.  But on the fiscal side, Washington continues its policies of mass inflation – via deficit spending.

The time for radical spending cuts was several decades ago.  Alas, the damage of all the reckless borrowing and spending cannot be undone.

And now, as net interest consumes more and more of the budget, things are quickly spiraling out of control.

The day will come, probably sooner rather than later, when the Fed will once again be called upon to buy Treasuries.  But unlike past episodes of quantitative easing, more and more of the printing press money will go to net interest payments.

Printing money to pay the interest on government debt is an ultimate marker of government failure.  Remember the crooks who did this.

[Editor’s note: Is the Pentagon secretly provoking China to attack Taiwan?  Are your finances prepared for such madness?  Answers to these important questions can be found in a unique Special Report.  You can access a copy here for less than a penny.]


MN Gordon
for Economic Prism

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